Shadow Boxing the Market: Option Pricing Without a Safe Haven
TL;DR for operators Discounting is the quiet plumbing of derivatives. Most option-pricing systems assume a risk-free asset sits somewhere in the background, calmly providing the rate at which future payoffs become present prices. This paper asks what happens when that safe haven is unavailable, unreliable, or merely too theoretical to be useful. Its answer is not to abandon discounting, but to manufacture it from the relative dynamics of two risky assets.1 ...