DEFINITION of 'RiskNeutral Measures'
A theoretical measure of probability derived from the assumption that the current value of financial assets is equal to their expected payoffs in the future discounted at the riskfree rate. Another assumption made is that there is an absence of arbitrage. The term derives its name from the fact that all financial assets have the same expected rate of return  i.e., the riskfree rate.
Also known as equivalent martingale measure or Qmeasure.
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BREAKING DOWN 'RiskNeutral Measures'
The concept of a riskneutral measure is used to price derivatives. The riskfree rate of return is the return on an investment where the theoretical risk is zero. In practice, the interest rate on threemonth U.S. Treasury bills is commonly used as a proxy for the riskfree rate.
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