What assumption do market participants use to price an asset/liability?

Market participants typically utilize the concept of market price equilibrium to price assets and liabilities. This concept suggests that in a competitive market, the price of an asset or liability reflects the balance of supply and demand. When market participants assess the value of an asset, they consider various factors, including the information available about future cash flows, the risks associated with those cash flows, and the return that is expected.

Market price equilibrium occurs when the quantity demanded equals the quantity supplied, resulting in a stable price. Participants in the market are assumed to have access to relevant information and are acting rationally, which means their collective actions will influence the pricing to a point where it reflects the true market value of the asset or liability.

In contrast, while future profitability, lifetime usage, and risk-return profiles are important considerations in evaluating the worth of an asset, they do not directly represent the assumption that market participants use in determining the price that reflects equilibrium in the market. Future profitability relates to expectations about earnings, lifetime usage refers to the operational lifespan of an asset, and the risk-return profile assesses the balance between expected risks and rewards, none of which inherently captures the dynamics of market pricing as effectively as the concept of market price equilibrium.