PART Three
Asset Prices and Market Relations
Financiers and investors spend much of their time establishing the values of financial instruments. For example, a financier needs to assess the value of a loan contract in order to determine the extent to which funds can profitably be advanced against it, and a trader needs an estimate of what a security might be worth before she bids to acquire it. Since risks can vary greatly across instruments, it is important to determine how risk and value are related. It would be even more important to have systematic ways of recognizing how uncertainty affects an instrument’s valuation, but this part of financial theory is still relatively underdeveloped, partly because the effects of uncertainty are largely unquantifiable.
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