Download e-book for kindle: Stochastic Calculus for Finance I: The Binomial Asset by Steven Shreve

By Steven Shreve

ISBN-10: 0387249680

ISBN-13: 9780387249681

Built for the pro Master's application in Computational Finance at Carnegie Mellon, the top monetary engineering application within the united states Has been demonstrated within the school room and revised over a interval of numerous years workouts finish each bankruptcy; a few of these expand the idea whereas others are drawn from sensible difficulties in quantitative finance

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Additional resources for Stochastic Calculus for Finance I: The Binomial Asset Pricing Model (Springer Finance)

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3. , 011 average, the next. period stock price is higher than the current stock price ) . This growth rate exceeds the 25% interest rate we have been using in this model, as it should. In particular, with p = � . q = t , and r = � , the discounted stock price has a tendency to rise. Note that when r = j- . we have 1lr � . so the discounted stock price at time n is ( � ) " S,. We compute 50% = IE, [ () 4 5 "+1 Sn+I l = () 4 5 "+1 1En [S'n+ d = () 4 5 " · 4 5 · 2 · Sn � 3 (4)" 5 S,. The discounted stock price i s a submartingale under the actual probabilities = � , q = t.

So far, we have discussed only derivative srcurities that pay off on a single date. Many securities, such as coupon-paying bonds and interest rate swaps, make a series of payments. For such a security, we have the following pricing and hedging formulas. 8 ( Cash flow valuation) . Consider an N -period binomial asset pricing-model with 0 < d < 1 + r < v, and with risk-neutral probability measure iiD. Let Co. cl ' . . ' eN be a sequence of random variables such that each Cn depends only on W J .

XN satisfied XN (w ) � 0 for all coin toss sequences w and XN (w) > 0 for at least one coin toss sequence w. 6. , a measure that agrees with the actual probability measure about which price paths have zero probability, and under which the discounted prices of all primary assets are martingales) , then there is no arbitrage in the model. This is sometimes called the First Fundamental Theorem of A sset Pricing. The essence of its proof is contained in the preceding paragraph: under a risk-neutral measure, the discounted wealth process has constant expectation.

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Stochastic Calculus for Finance I: The Binomial Asset Pricing Model (Springer Finance) by Steven Shreve

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