- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 46. Basics of Derivative Pricing and Valuation
- Subject 1. The Principle of Arbitrage

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**CFA Practice Question**

To obtain the derivative price we should assume that investors are ______.

B. risk-neutral

C. risk-seeking

A. risk-averse

B. risk-neutral

C. risk-seeking

Correct Answer: B

The investor's risk aversion is not a factor in determining the derivative price.

A derivative can be combined with an asset to produce a risk-free position. The derivative price is the price that guarantees the risk-free combination of the derivative and the underlying to produce a risk-free rate of return. Thus, the derivative price can be inferred from the characteristics of the underlying, the characteristics of the derivative, and the risk-free rate. The investor's risk-aversion is not a factor in determining the derivative price.

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