This book explains in simple settings the fundamental ideas of
financial market modelling and derivative pricing, using the
no-arbitrage principle. Relatively elementary mathematics leads to
powerful notions and techniques - such as viability, completeness,
self-financing and replicating strategies, arbitrage and equivalent
martingale measures - which are directly applicable in practice.
The general methods are applied in detail to pricing and hedging
European and American options within the Cox-Ross-Rubinstein (CRR)
binomial tree model. A simple approach to discrete interest rate
models is included, which, though elementary, has some novel
features. All proofs are written in a user-friendly manner, with
each step carefully explained and following a natural flow of
thought. In this way the student learns how to tackle new problems.
General
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