Elementary Stochastic Calculus, with Finance in View (Q4236352)

Stochastic calculus (SC) is one of the well-developed and well-standing branches of the contemporary mathematics. The numerous effective applications to areas outside mathematics made SC quite popular. Perhaps not so many people, however, were able to predict 25 years ago that finance business will become one of the most important and attractive areas of applications of SC. Today this is a fact, and this is a remarkable fact. It is really amazing to see how many first class specialists in SC moved to the new area usually called ``stochastic models in finance''. And naturally, practitioners in finance business quickly realized that they have to go appropriately into SC. This increased interest resulted in producing thousands of papers and a large number of books throughout the world. However a real and a serious problem appears. Namely, how to make SC accessible to a wider spectrum of people providing them with ``enough'' knowledge such that to have an adequate understanding of what from SC and why is used in the area of finance, and how this approach works. The book under review can be determined as a very successful work just in this direction. Its author is well-known for his works in SC. He has taken the risky task to write a book addressed to students and experts who do not follow a formal education in mathematics. Since SC requires advanced mathematical techniques, it is not easy to explain the main notions and facts which, at a first glance, look strange and unusual. However, the author's choice of the material is done with a good taste and expertise. The book represents the author's real experience of teaching courses on this subject at universities in New Zealand, The Netherlands, Switzerland and Belgium. The material is divided into the following four chapters: 1. Preliminaries, 2. The stochastic integral, 3. Stochastic differential equations, 4. Applications of stochastic calculus in finance. There are also six Appendices, Bibliography, Index and List of abbreviations and symbols. The book is very carefully written. All the notions, such as Brownian motion process, filtrations, stochastic integrals, Itô formula, stochastic differential equations and their solutions, are appropriately introduced and illustrated. The author follows exactly his original goal expressed in the subtitle of the book, namely ``finance in view''. Thus the text is well illustrated by examples described in terms of the basic finance theory: share prices, exchange rates, interest rates, volatility, options and other financial derivatives. After this preparation, the author demonstrates how to apply this ``theory'' to finance. European options and trading strategies are intensively discussed in the framework of the famous Black-Scholes model. The solution of the corresponding option pricing problem is presented and discussed. Useful notes about further readings are also given. The book can be strongly recommended to graduate students and practitioners in the field of finance and economics. It can also be used by readers who prefer to work independently. If the reader has a suitable background in mathematics, e.g. basic knowledge in areas such as measure theory, probability theory, functional analysis and stochastic processes, then he/she has a chance to benefit well when reading carefully the present book.