Stochastic analysis for finance with simulations (Q276302)

This book gives an introduction to financial mathematics. It presents also some background of mathematical facts necessary for understanding modern finance. Moreover, this book contains description of some computational methods using the software Matlab and simulations which allow to develop intuitions. The author stressed that ``the level of familiarity with computer programming is kept to a minimum''. So this book is accessible to a wider audience, but all these facts cause that this book has over 650 pages. For the reader convenience, the book contains a detailed contents, a list of figures, a list of tables, a list of simulations, a list of acronyms and a list of used symbols. In a short Part I, there are described fundamental concepts of mathematical finance such as risk, the no arbitrage principle, risk-neutral pricing, martingale measures and derivatives, on the example of one-period model with a finite sample space. This gives a nice introduction to problems of mathematical finance. Next, Parts II--IV give background in probability and stochastic analysis, which is a main tool in modern theory of finance. There are presented stochastic processes, Brownian motion, Girsanov's theorem, the Itô integral and stochastic differential equations. The important role of the Feynman-Kac theorem is emphasized by devoting to this theorem a separate chapter (Chapter 13). Parts V--VIII concern the mathematical finance. It begins with methods of option pricing describing in Part V. At first, the binomial tree method and using the Black-Scholes-Merton differential equation are presented. They are illustrated by computer experiments. In Chapter 16, the martingale method is discussed. Next, in Part VI examples of option pricing are given. On the example of a cash-or-nothing call option, the different methods of finding price of option, namely the methods of risk neutral measure pricing, partial differential equations, a Laplace transformation approach, and methods specific for this option: differentiation of a European call and differentiation of a binary call are analyzed, among others, in Chapter 17. In Chapter 18, pricing of exotic options such as Asian and barrier are considered. American options and algorithm of Longstaff and Schwartz for pricing such options is presented in Chapter 19. Part VII is devoted to the problem of portfolio management, the capital asset pricing model and portfolio management for optimal consumption measured by utility function is described. In Part VIII, a bond market is considered. In Chapter 22, pricing of bonds, and in Chapter 23, the basic interest rate models are presented. To make easier the pricing of derivatives the smart choice of numeraires is a good tool and it is described in Chapter 24. As you can see from the description above, the most important issues in financial mathematics have been raised in this book. It is worth to mention that in all chapters computer experiments are presented. Part IX describes computational methods used in finance. It contains elements of time series, Monte Carlo methods and numerical solutions. This book is finished with Appendixes A--E giving basic mathematical facts, Appendix F containing a brief introduction to the software Matlab, and moreover, answers to selected problems and glossary.