A factor model approach to derivative pricing (Q2832143)

The main goal of the current book is to present the conceptual underpinnings of derivative pricing from a single, unified perspective -- the factor model perspective. It focuses on establishing that factor model framework and how it can be applied to derivatives. In general, the book is written in an informal conversational style that emphasizes financial concepts over mathematical rigour.NEWLINENEWLINEThe book contains of 10 chapters, bibliography (53 sources) and index. Chapter 1 is introductory and devoted to the basic mathematics required for derivative pricing and financial engineering. Chapter 2 presents Ito's lemma for Brownian motion and Poisson process driven SDEs. Chapter 3 reviews some SDEs that have closed form solutions, including CIR, GBM and geometric Poisson motion (GPM). Absence of arbitrage conditions when returns are described by linear factor models are presented in Chapter 4, relying on Ross' arbitrage pricing theory. Chapter 5 constructs the basic framework that is used in the rest of the book for the modelling and pricing of derivative securities. An application of the factor model approach to equity derivatives is considered in Chapter 6. Applications of the factor model approach to interest rate and credit derivatives are presented in Chapter 7. Chapter 8 considers an application of the factor model approach to hedging. Chapter 9 provides an introduction to computational methods used in derivative pricing from the factor model perspective. The basic idea of risk-neutral pricing from the factor model approach is explained in Chapter 10.NEWLINENEWLINEThis book is aimed at the introductory graduate or advanced undergraduate student who already has an exposure to the basic mechanics of options, futures, forwards, and the other derivatives. Also, researchers and advanced graduate students who desire an understanding of the simple underpinnings that hold together the vast array of derivative pricing models will be well rewarded.