Thorp approximated warrant values by assuming stocks rise at the riskless interest rate.

Evidence

Thorp decided to approximate it by assuming that the expected price of the stock rose at the riskless rate of interest (the rate paid by a borrower who creditors are certain will not default, for which a usual indicator is the yield of bonds issued in their own currencies by major governments). He had no better estimate, and he “didn’t think that enormous errors would necessarily be introduced” by the approximation. — Donald MacKenzie, An Engine, Not a Camera, 557

Categorization

• XREF: connects to: Option prices equal the expected payoff discounted at the riskless rate — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1284; the risk-neutral valuation insight lets options be priced by discounting at the riskless rate — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 583; The option price is independent of the stock’s expected return. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 582

Broader Connections

• the risk-neutral valuation insight lets options be priced by discounting at the riskless rate #expands (0.92) — Donald MacKenzie, An Engine, Not a Camera, 583
• Option prices equal the expected payoff discounted at the riskless rate #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1284
• The option price is independent of the stock’s expected return. #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 582