Download PDF. Sharing is caring More. Leave a Reply Cancel reply Comment. Enter your name or username to comment. Enter your email address to comment. Enter your website URL optional. Search this website Type then hit enter to search. Share via. Copy Link. Powered by Social Snap. Copy link. Copy Copied. Financial mathematics is an application of advanced mathematical and statistical methods to financial management and markets, with a main objective of quantifying and hedging risks.
Since the book aims to present the basics of financial mathematics to the reader, only essential elements of probability and stochastic analysis are given to explain ideas concerning derivative pricing and hedging. It also introduces main financial instruments such as forward and futures contracts, bonds and swaps, and options. The second part deals with pricing and hedging of European- and American-type options in the discrete-time setting.
In addition, the concept of complete and incomplete markets is discussed. Elementary probability is briefly revised and discrete-time discrete-space stochastic processes used in financial modelling are considered.
The third part introduces the Wiener process, Ito integrals and stochastic differential equations, but its main focus is the famous Black—Scholes formula for pricing European options. Some guidance for further study within this exciting and rapidly changing field is given in the concluding chapter. There are approximately exercises interspersed throughout the book, and solutions for most problems are provided in the appen.
It covers a broad range of foundation topics related to financial modeling, including probability, discrete and continuous time and space valuation, stochastic processes, equivalent martingales, option pricing, and term structure models, along with related valuation and hedging techniques.
The joint effort of two authors with a combined 70 years of academic and practitioner experience, Risk Neutral Pricing and Financial Mathematics takes a reader from learning the basics of beginning probability, with a refresher on differential calculus, all the way to Doob-Meyer, Ito, Girsanov, and SDEs.
Includes more subjects than other books, including probability, discrete and continuous time and space valuation, stochastic processes, equivalent martingales, option pricing, term structure models, valuation, and hedging techniques Emphasizes introductory financial engineering, financial modeling, and financial mathematics Suited for corporate training programs and professional association certification programs.
Score: 5. Its scope is limited to the general discrete setting of models for which the set of possible states is finite and so is the set of possible trading times--this includes the popular binomial tree model. This setting has the advantage of being fairly general while not requiring a sophisticated understanding of analysis at the graduate level. Topics include understanding the several variants of "arbitrage," the fundamental theorems of asset pricing in terms of martingale measures, and applications to forwards and futures.
The authors' motivation is to present the material in a way that clarifies as much as possible why the often confusing basic facts are true. Therefore the ideas are organized from a mathematical point of view with the emphasis on understanding exactly what is under the hood and how it works. Every effort is made to include complete explanations and proofs, and the reader is encouraged to work through the exercises throughout the book.
The intended audience is students and other readers who have an undergraduate background in mathematics, including exposure to linear algebra, some advanced calculus, and basic probability. The book has been used in earlier forms with students in the MS program in Financial Mathematics at Florida State University, and is a suitable text for students at that level.
Students who seek a second look at these topics may also find this book useful. Popular Books. Fear No Evil by James Patterson. The Becoming by Nora Roberts. Microstructure changes brought about reduction in transaction cost that helped investors to lock in a deal faster and cheaper. The reforms process have helped to improve efficiency in information dissemination, enhancing transparency, prohibiting unfair trade practices like insider trading and price rigging.
Introduction of derivatives in Indian capital market was initiated by the Government through L C Gupta Committee report. The L. Gupta Committee on Derivatives had recommended in December the introduction of stock index futures in the first place to be followed by other products once the market matures. The preparation of regulatory framework for the operations of the index futures contracts took some more time and finally futures on benchmark indices were introduced in June followed by options on indices in June followed by options on individual stocks in July and finally followed by futures on individual stocks in November The underlying asset can be equity, forex, commodity or any other asset.
Emergence of Financial Derivative Products Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by s, they accounted for about two-thirds of total transactions in derivative products.
In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use.
The lower costs associated with index derivatives vis—a—vis derivative products based on individual securities is another reason for their growing use. They use futures or options markets to reduce or eliminate this risk. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture.
Index Copernicus Value: 3. FUTURES A futures contract is an agreement between two parties to buy or sell an asset in a certain time at a certain price, they are standardized and traded on exchange. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.
Longer-dated options are called warrants and are generally traded over-the counter. These are options having a maturity of up to three years. The underlying asset is usually a moving average of a basket of assets.
Equity index options are a form of basket options. SWAPS Swaps are private agreements between two parties to exchange cash floes in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. Thus a swaption is an option on a forward swap.
Gupta develop the appropriate regulatory framework for derivative trading in India. The committee submitted its report in March On May 11, SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index Futures. The provision in the SCR Act governs the trading in the securities. The exchange shall regulate the sales practices of its members and will obtain approval of SEBI before start of Trading in any derivative contract.
The members of the derivatives segment need to fulfill the eligibility conditions as lay down by the L. Gupta committee. Exchange should also submit details of the futures contract they purpose to introduce.
While futures and options are now actively traded on many exchanges, forward contracts are popular on the OTC market. In this chapter we shall study in detail these three derivative contracts. Forward Contracts A forward contract is an agreement to buy or sell an asset on a specified future date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price.
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