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1.1 Brownian Motion and Poisson Processes
1.1.1 Gaussian Random Variables
1.1.2 Brownian Motion
increments of Brownian motion and Poisson processes
1.2 Stochastic Diﬀerential Equations
1.2.1 Diﬀerentials
1.2.2 The Diﬀerential
1.2.3 Compound Poisson Process
1.2.4 Ito Stochastic diﬀerential equations
1.2.5 Poisson Driven Diﬀerential Equations
2.1.1 The chain rule of ordinary calculus
2.1.2 Ito’s lemma for Brownian motion
(⋆) Ito’s Lemma for Brownian Motion:
2.1.4 Discussion of Ito’s lemma
2.2 Ito’s lemma for Poisson Processes
2.2.1 Interpretation of Ito’s lemma for Poisson
2.3 More versions of Ito’s Lemma
2.3.1 Ito’s Lemma for Compound Poisson Processes
(⋆) Ito’s Lemma for Compound Poisson Processes:
2.3.2 Ito’s Lemma for Brownian and Compound Poisson Processes
2.3.3 Ito’s Lemma for vector processes
2.4 Ito’s lemma, the product rule, and a rectangle
2.5 Summary
2.6 Problems
3.1 Geometric Brownian Motion
3.1.1 Stock Price Interpretation
3.2 Geometric Poisson Motion
3.2.1 A conditional lognormal version of geometric Poisson Motion
3.3 A jump-diﬀusion model
3.4 A more general SDE
3.4.1 The Ornstein-Uhlenbeck Process and Mean Reversion
3.5 Cox-Ingersoll-Ross Process
3.6 Summary
3.7 Problems
4.1 The Factor Approach to Arbitrage Pricing
4.2 Returns and Factors Models
4.2.1 Returns
4.2.2 Stochastic diﬀerential equations and factor models
4.3. THE FACTOR APPROACH TO ARBITRAGE USING RETURNS 31
4.3 The Factor Approach to Arbitrage using Returns
4.3.1 Arbitrage
4.3.2 Null and Range Space Relationship
4.3.3 A Useful Absence of Arbitrage Condition
4.3.4 Interpretations
4.3.5 A Problem with Returns
4.4 The Factor Approach using Price Changes
4.4.1 Price Changes and Arbitrage
4.4.2 Proﬁt/Loss and Arbitrage
4.5 Two standard examples
4.5.1 Stocks
4.5.2 Futures contracts
4.6 Summary
4.7 Problems
5.1 Introduction
5.2 A Classiﬁcation of Quantities
5.2.1 Factors
5.2.2 Underlying Variables
5.2.4 A Derivative is a Tradable
5.3. FACTOR MODELS FOR UNDERLYING VARIABLES AND TRADABLES 43
5.3 Factor Models for Underlying Variables and Tradables
5.3.1 Direct Factor Models
5.3.2 Factor Models via Ito’s Lemma
5.5 Applying the Price APT
5.5.1 Relative Pricing and Marketed Tradables
5.5.2 Pricing the Derivative
5.5.3 Underdetermined and Overdetermined Systems
5.6 Three Step Procedure
5.7 Summary
5.8 Problems
6.1 Examples from Equity Derivatives
6.1.1 Black-Scholes
6.1.2 Dividend Paying Stocks
6.1.3 Cash Dividends
6.1.4 Poisson Processes
6.1.5 Options on Futures
6.1.6 Jump diﬀusion
6.1.7 Exchange one asset for another
6.1.8 Stochastic volatility
6.2 Problems
Interest Rate and Credit Derivatives
7.1 Notation and the Money Market Account
7.2 Interest Rate Derivatives
7.2.1 Single Factor Short Rate Models
7.2.2 Multi-Factor Short Rate Models
7.2.3 Heath-Jarrow-Morton
7.2.4 The LIBOR Market Model
7.3 Credit Derivatives
7.3.1 Defaultable Bonds
7.3.2 Defaultable Bonds with Random Intensity of Default
7.4 Problems
Hedging
8.1 Introduction
8.2 Hedging from a Factor Perspective
8.2.1 Description Using a Tradables Table
8.2.2 The Relationship Between Hedging and Arbitrage
8.2.3 Hedging Examples
8.2.4 Hedging under Incompleteness
8.2.5 A Question of Consistency
8.3. HEDGING FROM AN UNDERLYING VARIABLE SENSITIVITY PERSPECTIVE 83
8.3 Hedging from an Underlying Variable Sensitivity Perspective
8.3.1 Black-Scholes Hedging
8.3.2 Hedging Bonds
8.3.3 Derivatives imply Small Changes
8.4 Higher Order Approximations
8.4.1 The Greeks
8.4.2 A Delta-Gamma Hedge
8.4.3 Determining what the error looks like
8.5 Summary
8.6 Problems
The Road to Risk Neutrality
9.1 Introduction
9.2 Do the Factors Matter?
9.2.1 Brownian Factors
9.2.2 Poisson Factors
9.3 Risk Neutral Representations
9.3.1 Brownian Factors
9.3.2 Poisson Factors
9.4 Pricing as an Expectation
9.5. APPLICATIONS OF RISK NEUTRAL PRICING 95
9.5 Applications of Risk Neutral Pricing
9.5.1 How to Apply Risk Neutral Pricing
9.5.2 Black-Scholes
9.5.3 Poisson Model
9.5.4 HJM
9.5.5 Libor Market Model
9.6 Summary
9.7 Problems
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FEbook1MAIN

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Published by: gwydior on Aug 16, 2011

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