What is the impact of the risk aversion in the spot price of an asset?

A. The higher the risk aversion, the higher the spot price.
B. The higher the risk aversion, the lower is the spot price
C. Risk aversion has no impact on the spot price of an asset

Correct Answer: B

Most of the investors are risk-averse, i.e. they do not accept the risk without expecting some additional return for that risk. A risk neutral investor is one who does not care for the risk and does not require a risk premium to invest in a risky asset. A risk-seeking investor is one who does who is ready to take a negative risk premium and prefers risky securities than riskless securities with the same return.

The spot price of an asset is calculated by taking the present value of the expected future spot rate. The discount rate increases with the risk-averseness of the investor. The higher the risk averseness, the higher the discount rate, and the lower the spot price.