In my textbook there's the following question: "When a trader in the market has to value a uncertain payment that he'll receive in the future (e.g. a payment of 10 or -10 in 1 year), does he have to consider his own risk aversion? Yes or no?"
In risk neutral valuation risk aversion is irrelevant. I'd like to know, what are exactly the criteria for that risk neutral valuation can be applied? Does it need to be an option? Can the example above be regarded as an option? If yes, what would be its underlying and under what circumstances is the risk aversion of the individuum relevant? Under what circumstances is it not possible to value something with risk neutral valuation?
thanks Nicolas