Using Risk-Adjusted Interest Rates in Option Pricing

This project introduces a method for pricing options by adjusting for project-specific risk. It builds from the CAPM model, linking market returns, project returns, and risk premiums into a consistent option pricing formula. The key idea is to modify the standard risk-free rate to reflect the real risk of the underlying project. Using relationships between objective and risk-neutral probabilities, the model better accounts for the uncertainties investors face. This approach helps make option valuation more accurate for real-world investment decisions