Discrete-time Asset Pricing Models in Applied Stochastic FinanceISBN: 978-1-84821-158-2
Hardcover
416 pages
March 2010, Wiley-ISTE
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These two volumes aim to provide a foundation course on applied
stochastic finance. They are designed for three groups of readers:
firstly, students of various backgrounds seeking a core knowledge
on the subject of stochastic finance; secondly financial analysts
and practitioners in the investment, banking and insurance
industries; and finally other professionals who are interested in
learning advanced mathematical and stochastic methods, which are
basic knowledge in many areas, through finance.
Volume 1 starts with the introduction of the basic financial instruments and the fundamental principles of financial modeling and arbitrage valuation of derivatives. Next, we use the discrete-time binomial model to introduce all relevant concepts. The mathematical simplicity of the binomial model also provides us with the opportunity to introduce and discuss in depth concepts such as conditional expectations and martingales in discrete time. However, we do not expand beyond the needs of the stochastic finance framework. Numerous examples, each highlighted and isolated from the text for easy reference and identification, are included.
The book concludes with the use of the binomial model to introduce interest rate models and the use of the Markov chain model to introduce credit risk. This volume is designed in such a way that, among other uses, makes it useful as an undergraduate course.