Market expectations and option prices

This book is a revised version of my doctoral dissertation accepted by the Department of Economics and Business Administration at Justus-Liebig-Universität Giessen in July 2002. I extend my gratitude to my advisor, Prof. Dr. Volbert Alexander, for his encouragement and support throughout my research, and to Prof. Dr. Horst Rinne, the second member of my doctoral committee. Special thanks are due to Dr. Ralf Ahrens for providing part of the data and to my colleague Carsten Lang for his thorough review of the first draft. The book begins with an introduction, followed by a theoretical foundation section that covers arbitrage pricing and risk-neutral probabilities. Key topics include arbitrage pricing in the Black/Scholes-Merton model, the equivalent martingale measure, and risk-neutral valuation, along with methods for extracting risk-neutral probabilities from option prices. An appendix provides further details on the valuation function and replication strategy. The literature survey examines the information content of forward and futures prices, the insights from implied volatilities, and their forecasting capabilities. It also discusses the skewness premium, highlighting the relevance of these concepts in understanding financial markets.