From actuarial to financial valuation principles (Q5938026)

This paper bridges two main approaches for pricing of claims, the actuarial approach and the financial approach for pricing of derivatives. The idea is to equate the values obtained from two strategies: the first is the maximal value from a given inititial capital, and the second when the payoff is sold to increase the initial capital and traded to maximize the final value. The resulting valuation is called the financial transform of the apriori valuation rule. The mathematical framework uses \(L^2\)-set up and a combination of pricing by using a utility function and no arbitrage arguments. Financial transforms of the variance valuation principle as well as standard deviation valuation principle are derived. Two basic examples consider the case of no financial market and a complete financial market, where known valuation formulae are recovered.