Explain risk-neutral valuation concept used in derivative pricing.

Explain risk-neutral valuation concept used in derivative pricing.

• A. Prices reflect investor risk preferences and require risk premia.
• B. Prices are derived as the discounted expected payoff under a risk-neutral measure, using the risk-free rate; no-arbitrage framework.
• C. Prices ignore discounting and use historical averages.
• D. Prices are set by regulatory authorities.

Answer: (B)