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Introduction to Probability Theory
1.1 The Binomial Asset Pricing Model
1.2 Finite Probability Spaces
1.3 Lebesgue Measure and the Lebesgue Integral
1.4 General Probability Spaces
1.5 Independence
1.5.1 Independence of sets
1.5.2 Independence of -algebras
1.5.3 Independence of random variables
1.5.4 Correlation and independence
1.5.5 Independence and conditionalexpectation
1.5.6 Law of Large Numbers
1.5.7 Central Limit Theorem
Conditional Expectation
2.1 A Binomial Model for Stock Price Dynamics
2.2 Information
2.3 Conditional Expectation
2.3.1 An example
2.3.2 Deﬁnition of Conditional Expectation
2.3.3 Further discussion of Partial Averaging
2.3.4 Properties of Conditional Expectation
2.3.5 Examples from the Binomial Model
2.4 Martingales
Arbitrage Pricing
3.1 Binomial Pricing
3.2 General one-step APT
3.3 Risk-Neutral Probability Measure
3.3.1 Portfolio Process
3.3.2 Self-ﬁnancingValue of a Portfolio Process
3.4 Simple European Derivative Securities
3.5 The Binomial Model is Complete
The Markov Property
4.1 Binomial Model Pricing and Hedging
4.2 Computational Issues
4.3 Markov Processes
4.3.1 Different ways to write the Markov property
4.4 Showing that a process is Markov
4.5 Application to Exotic Options
Stopping Times and American Options
5.1 American Pricing
5.2 Value of Portfolio Hedging an American Option
5.3 Information up to a Stopping Time
Properties of American Derivative Securities
6.1 The properties
6.2 Proofs of the Properties
6.3 Compound European Derivative Securities
7.3 Stopped Martingales
Random Walks
8.1 First Passage Time
8.2 is almost surely ﬁnite
8.3 The moment generating function for
8.4 Expectation of
8.5 The Strong Markov Property
8.6 General First Passage Times
8.7 Example: Perpetual American Put
8.8 Difference Equation
8.9 Distribution of First Passage Times
8.10 The Reﬂection Principle
Pricing in terms of Market Probabilities: The Radon-Nikodym Theorem
9.3 The State PriceDensity Process
9.4 Stochastic Volatility Binomial Model
9.5 Another Applicaton of the Radon-Nikodym Theorem
Capital Asset Pricing
10.1 An Optimization Problem
General Random Variables
11.1 Law of a Random Variable
11.2 Density of a Random Variable
11.3 Expectation
11.4 Two random variables
11.5 Marginal Density
11.6 Conditional Expectation
11.7 Conditional Density
11.8 Multivariate Normal Distribution
11.9 Bivariate normal distribution
11.10 MGF of jointly normal random variables
Semi-Continuous Models
12.1 Discrete-timeBrownian Motion
12.2 The Stock PriceProcess
12.3 Remainder of the Market
12.4 Risk-Neutral Measure
12.5 Risk-Neutral Pricing
12.6 Arbitrage
12.7 Stalking the Risk-Neutral Measure
12.8 Pricing a European Call
Brownian Motion
13.1 Symmetric Random Walk
13.2 The Law of Large Numbers
13.3 Central Limit Theorem
13.4 Brownian Motion as a Limit of Random Walks
13.5 Brownian Motion
13.6 Covariance of Brownian Motion
13.7 Finite-Dimensional Distributions of Brownian Motion
13.8 Filtration generated by a Brownian Motion
13.9 Martingale Property
13.10 The Limit of a Binomial Model
13.11 Starting at Points Other Than 0
13.12 Markov Property for Brownian Motion
13.14 First Passage Time
The Itˆo Integral
14.1 Brownian Motion
14.2 First Variation
14.4 Quadratic Variation as Absolute Volatility
14.5 Construction of the Itˆo Integral
14.6 Itˆo integral of an elementary integrand
14.7 Properties of the Itˆo integral of an elementary process
14.8 Itˆo integral of a general integrand
14.9 Properties of the (general) Itˆo integral
14.10 Quadratic variation of an Itˆo integral
Itˆo’s Formula
15.1 Itˆo’s formula for one Brownian motion
15.2 Derivation of Itˆo’s formula
15.3 GeometricBrownian motion
15.4 Quadratic variation of geometricBrownian motion
15.5 Volatility of GeometricBrownian motion
15.6 First derivation of the Black-Scholes formula
15.7 Mean and variance of the Cox-Ingersoll-Ross process
15.8 Multidimensional Brownian Motion
15.9 Cross-variations of Brownian motions
15.10 Multi-dimensional Itˆo formula
Markov processes and the Kolmogorov equations
16.1 Stochastic Differential Equations
16.2 Markov Property
16.3 Transition density
16.4 The Kolmogorov Backward Equation
16.5 Connection between stochastic calculus and KBE
16.6 Black-Scholes
16.7 Black-Scholes with price-dependent volatility
17.2 Risk-neutral measure
Martingale Representation Theorem
18.1 Martingale Representation Theorem
18.2 A hedging application
-dimensional Martingale Representation Theorem
18.5 Multi-dimensional market model
A two-dimensional market model
19.2 Hedging when
Pricing Exotic Options
20.1 Reﬂection principle for Brownian motion
20.2 Up and out European call
20.3 A practical issue
21.1 Feynman-Kac Theorem
21.2 Constructing the hedge
21.3 Partial average payoff Asian option
Summary of Arbitrage Pricing Theory
22.1 Binomial model, Hedging Portfolio
22.2 Setting up the continuous model
22.3 Risk-neutral pricing and hedging
22.4 Implementation of risk-neutral pricing and hedging
Recognizing a Brownian Motion
23.1 Identifying volatility and correlation
23.2 Reversing the process
An outside barrier option
24.1 Computing the option value
24.2 The PDE for the outside barrier option
24.3 The hedge
American Options
25.1 Preview of perpetual American put
25.2 First passage times for Brownian motion: ﬁrst method
25.5 First passage times: Second method
25.6 Perpetual American put
25.7 Value of the perpetual American put
25.8 Hedging the put
25.9 Perpetual American contingent claim
25.10 Perpetual American call
25.11 Put with expiration
25.12 American contingent claim with expiration
Options on dividend-paying stocks
26.1 American option with convex payoff function
26.2 Dividend paying stock
26.3 Hedging at timet
Bonds, forward contracts and futures
27.1 Forward contracts
27.2 Hedging a forward contract
27.3 Future contracts
27.4 Cash ﬂow from a future contract
27.6 Backwardation and contango
Term-structure models
28.1 Computing arbitrage-freebond prices: ﬁrst method
28.2 Some interest-ratedependent assets
28.3 Terminology
28.4 Forward rate agreement
28.6 Computing arbitrage-free bond prices: Heath-Jarrow-Morton method
28.7 Checking for absence of arbitrage
28.8 Implementation of the Heath-Jarrow-Morton model
Gaussian processes
29.1 An example: Brownian Motion
Hull and White model
30.1 Fiddling with the formulas
30.4 Option on a bond
Cox-Ingersoll-Ross model
31.2 Kolmogorov forward equation
31.3 Cox-Ingersoll-Ross equilibrium density
31.4 Bond prices in the CIR model
31.5 Option on a bond
31.6 Deterministic time change of CIR model
31.7 Calibration
A two-factor model (Dufﬁe & Kan)
32.1 Non-negativity ofY
32.2 Zero-coupon bond prices
32.3 Calibration
Change of num´eraire
33.1 Bond price as num´eraire
33.2 Stock price as num´eraire
33.3 Merton option pricing formula
Brace-Gatarek-Musiela model
34.1 Review of HJM under risk-neutralI P
34.2 Brace-Gatarek-Musiela model
34.3 LIBOR
34.4 Forward LIBOR
34.6 Implementation of BGM
34.7 Bond prices
34.8 Forward LIBOR under more forward measure
34.9 Pricing an interest rate caplet
34.10 Pricing an interest rate cap
34.11 Calibration of BGM
34.12 Long rates
34.13 Pricing a swap
35.1 Probability theory and martingales
35.2 Binomial asset pricing model
35.3 Brownian motion
35.4 Stochastic integrals
35.5 Stochastic calculus and ﬁnancial markets
35.6 Markov processes
35.8 Exotic options
35.9 American options
35.10 Forward and futures contracts
35.11 Term structure models
35.12 Change of num´eraire
35.13 Foreign exchange models
35.14 REFERENCES
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Steven Shreve. Lectures on Stochastic Calculus and Finance

# Steven Shreve. Lectures on Stochastic Calculus and Finance

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04/06/2013

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