general this approach does not group assets but rather creates a unique risk price for each asset; these models are then of "low dimension". For further discussion, see § Derivatives pricing: the Q world under Mathematical finance. Calculating option prices (or their "Greeks") combines: (i) a model of the underlying price behavior, or "process" - ie the asset pricing model selected; and (ii) a mathematical method which returns the premium (or sensitivity) as the expected value of option payoffs over the range of prices of the underlying. See . The classical model here is Black–Scholes which describes the dynamics of a market including derivatives (with its option pricing formula); leading more generally to Martingale pricing, as well as the aside models. Black–Scholes assumes a log-normal process; the other models will, for example, incorporate features such as mean reversion, or will be "volatility surface aware", applying local volatility or stochastic volatility. Rational pricing is also applied to fixed income instruments such as bonds (that consist of just one asset), as well as to interest rate modeling in general, where yield curves must be arbitrage free with respect to the prices of individual instruments. See , Bootstrapping (finance), Multi-curve framework. As regards options on these instruments, and other interest rate derivatives, see short-rate model and Heath–Jarrow–Morton framework for discussion as to how the various models listed above are applied. Interrelationship These principles are interrelated through the Fundamental theorem of asset pricing. Here, "in the absence of arbitrage, the market imposes a probability distribution, called a risk-neutral or equilibrium measure, on the set of possible market scenarios, and... this probability measure determines market prices via discounted expectation". Correspondingly, this essentially means that one may make financial decisions, using the risk neutral probability distribution consistent with (i.e. solved for) observed equilibrium prices. See . Related articles List of financial economics articles References Financial economics Asset Pricing Financial models