BRIYS NOTES:

FOREWORD:

The reason here is that the relationship of the option price to the price of the underlying does not depend on investors' attitudes
toward risk, and therefore must be the same as in a risk-neutral world (and in a risk-neutral world, we know how assets are priced:
as the expected present values of their payouts).

Forward rate contracts are flexible and allow for customized hedges since all the terms
can be negotiated with the countcrparty. However, each side of the contract bears the risk
that t 1e other side defaults on the future commitments. This is the reason why futures
contracts are often preferred to forward contracts.
CHAPTER 2: THE DYNAMICS OF ASSET PRICES
CHAPTER 3: APPLICATIONS TO ASSET PRICING IN COMPLETE MARKETS