Pricing Derivatives: The Financial Concepts Underlying the Mathematics of Pricing Derivatives
Irwin Library of Investment and Finance A great number of books on mathematical finance are currently available. These books tend to focus on the mechanics of the financial models and the mathematics to make those models work. Virtually all of them ignore the underlying financial concepts upon which the formulas and models are built. In 1997, the author began consulting with derivative traders from AIG Trading Corporation. It quickly became clear that the traders needed to focus on the conceptual issues as they arose in real-life situations. Pricing Derivatives presents a new and original approach to the mathematics of pricing derivatives by stressing the original conceptual foundations underlying the mathematics. While providing the conceptual foundations of pricing derivatives and other financial instruments, it also gives a thorough account of the theoretical and mathematic foundations of pricing derivatives. The author starts with a complete examination of the relation between price and probability, which provides the structure for the entire book (Part I). He then goes into pricing structures of all the major derivative instruments (Part II). lightly focused on one idea. These short chapters do not include very much math but do lead to a quick understanding of the structure and concept behind the math. The reader is left with a clear understanding of the essentials of various formulas and models but with a minimum of math. The focus here is on the core mathematical ideas as opposed to the technical machinery of trading. Part III moves into some very heavy and sophisticated math. The author analyzes the general structure of models from the conceptual approach outlined previously but with a heavy emphasis on the math. He then explores two popular models in greater detail. Overall, Pricing Derivatives presents new ideas and methods for pricing derivative products and demonstrates how to compute specific price formulas. Specific topics covered include: Price in terms of the max-min principles that underlie game theory - Explanations of the foundations of stochastic models of pricing in light of various models and formulas - How to derive model independent pricing formulas for each derivative
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