9.20 Risk-Neutral valuation The variable u does NoT appear in the solution to the option value using the Binomial Method Thus, the solution is independent of all variables affected by risk preference The solution is therefore the same in a risk-free world as it is in the real world Hence, we can assume that the world is risk- neutral This leads to the principle of risk-neutral valuation 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 9.20 Risk-Neutral Valuation • The variable  does NOT appear in the solution to the option value using the Binomial Method • Thus, the solution is independent of all variables affected by risk preference • The solution is therefore the same in a risk-free world as it is in the real world • Hence, we can assume that the world is risk￾neutral • This leads to the principle of risk-neutral valuation •