Event

QWAFAFEW Denver - September 22nd Meeting

Risk neutral models are used for options pricing, where the path distributions are such that the average values grow only at the risk free rate. But in practice, we know that stocks offer a risk premium to compensate for added risk. So how do we model these distributions? This is introduced in real world models. Real world models are much like the risk neutral models, but the distribution of paths generated by real world models are more in line with what we observe in practice. These models yield above risk free rate averages through the use of a risk premium term. We can also use a hybrid framework, where one can take these real world models and incorporate the correlations between different securities/indices consistent with market observations.

In this presentation, Goutham will introduce the concept of Risk-Neutral models and Real World models, and compare and contrast them. We will also discuss use cases for each, demonstrate some basic capabilities and features of Real World models, and Introduce hybrid models which can incorporate correlation effects.