risk-neutral valuation

Risk-neutral valuation is a financial concept used to evaluate investments or assets by assuming that investors are indifferent to risk. In this framework, future cash flows are discounted at a risk-free rate, meaning that the potential for gains or losses is not factored into the price. This approach simplifies the valuation process by treating all outcomes as equally likely and focuses on the expected return an investment may yield, rather than the risks involved. It helps analysts determine fair value, especially in pricing derivatives and other complex financial instruments.