Discrete-time Asset Pricing Models in Applied Stochastic Finance (ePub)

Stochastic finance and financial engineering have been rapidly
expanding fields of science over the past four decades, mainly due
to the success of sophisticated quantitative methodologies in
helping professionals manage financial risks. In recent years, we
have witnessed a tremendous acceleration in research efforts aimed
at better comprehending, modeling and hedging this kind of
risk.



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.