Asset pricing under the certainty equivalent approach framework always raises the current value of the asset with the riskless rate first, followed immediately by risk adjustments. Clearly, this type of arrangement does not apply to assets that are expecting to lose values if it were to adhere to feasible economic reasoning. By using the put-call parity relationship and its underlying law of no arbitrage, the needed expected rates of return for the job of option pricing can thus be obtained. This study suggests a new model in old fashion, which can better satisfy the empirical criticism of the Black-Scholes option pricing model.
Cite this paper
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