Risk-Neutral Valuation: Pricing and Hedging of Financial Derivatives
Since its introduction in the early 1980s, the risk-neutral valuation principle has proved to be an important tool in the pricing and hedging of financial derivatives. Following the success of the first edition of ‘Risk-Neutral Valuation’, the authors have thoroughly revised the entire book, taking into account recent developments in the field, and changes in their own thinking and teaching. In particular, the chapters on Incomplete Markets and Interest Rate Theory have been updated and extended, there is a new chapter on the important and growing area of Credit Risk and, in recognition of the increasing popularity of Lévy finance, there is considerable new material on: · Infinite divisibility and Lévy processes · Lévy-based models in incomplete markets Further material such as exercises, solutions to exercises and lecture slides are also available via the web to provide additional support for lecturers.
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arbitrage arbitrage opportunities arbitrage price arbitrage-free asset pricing assume binomial Black-Scholes model bond prices Brownian motion call option Chapter conditional expectation contingent claim continuous continuous-time convergence decomposition default defined Definition density derivative discounted discrete discrete-time dynamics equivalent martingale measure European call example exists expiry filtration financial assets financial market model Gaussian given independent interest rates investor Lebesgue Lemma Lévy process LIBOR linear local martingale Markov mathematical finance maturity measure Q no-arbitrage numéraire optimal option prices parameter payoff Poisson process portfolio price process pricing formula probability measure probability measure IP probability space Proof Proposition put option quadratic variation Radon-Nikodým random variables replicating result risk risk-free risk-neutral valuation Schweizer self-financing semi-martingale sequence stochastic differential equation stochastic integral stochastic process stock price strike price supermartingale swap Theorem theory trading strategy underlying unique vector volatility zero