9.17 Irrelevance of a stocks e(r) (continued) The probability of an increase in the stock price is irrelevant because options are redundant securities In our two-step models, we form a risk-less portfolio with stock and the option Thus, the return/pay-off from the option is offset by the return on the stock and the portfolio return is the same in both states Thus, no matter what the probability of a stock increase, the answer is the same Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal UniversityOptions, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 9.17 Irrelevance of a Stock’s E(R) (continued) • The probability of an increase in the stock price is irrelevant because options are redundant securities • In our two-step models, we form a risk-less portfolio with stock and the option • Thus, the return/pay-off from the option is offset by the return on the stock and the portfolio return is the same in both states • Thus, no matter what the probability of a stock increase, the answer is the same •