Pricing Residential Real Estate Derivatives

Abstract

This article, which is primarily didactic in nature, provides basic intuition on asset pricing and risk-neutral valuation with a specific focus on residential real estate. I look into the pricing of physical real estate and two variations of derivative. I derive some specific valuation formulas in a highly simplified context of a one-period economy on a discrete probability space. I generalise the formulas to a limited extent for a multi-period economy. The formulas can be applied to richer structures in a straightforward manner and which I hope to do in future iterations of this text.