Product Description

Here is the first rigorous and accessible account of the mathematics behind the pricing, construction, and hedging of derivative securities. With mathematical precision and in a style tailored for market practioners, the authors describe key concepts such as martingales, change of measure, and the Heath-Jarrow-Morton model. Starting from discrete-time hedging on binary trees, the authors develop continuous-time stock models (including the Black-Scholes method). They stress practicalities including examples from stock, currency and interest rate markets, all accompanied by graphical illustrations with realistic data. The authors provide a full glossary of probabilistic and financial terms.

Product Details

• Amazon Sales Rank: #42047 in Books
• Published on: 1996-09-28
• Number of items: 1
• Binding: Hardcover
• 233 pages

Review
"...a rigorous and accessible account of the probabilistic structure behind the pricing, construction, and hedging of derivative securities....Real examples from stock, currency, and interest rate markets are used. The text also gives a clear view and introduction to modern mathematical finance for probabilists and statisticians." The Journal of the American Statistical Association

Customer Reviews

Modern And Up-To-Date
"Martin Baxter
Works at Nomura International in London.
He was a Fellow for four years at Pembroke College, Cambridge, has held a one-year visiting position at the University of British Columbia, and has been an invited speaker to both academic and financial audiences in Europe and North America.

Andrew Rennie
Studied mathematics at Cambridge.
He is presently Head of Financial Engineering at Rabo Bank in London, a position he reached via philosophy, chemistry and graphic design."
[from the book of the front flap]

"The book is the First published 1996
Reprinted with corrections 1997
Reprinted 1998 (twice), 2000 (twice), 2001 (twice)
Printed in the United Kingdom at the University Press, Cambridge."
[from the book]

".....This unique, MODERN AND UP-TO-DATE book will be an essential purchase for market practitioners, quantitative analysts, and derivatives traders, whether existing or trainees, in investment banks in the major financial centres throughout the world."
[from the book of the back jacket]

Excellent introduction
I think this is one of the best introductions to mathematical finance around. Unfortunately, the book was out of print when I taught the subject, so I never got to test it as a textbook.

In particular I really like chapter 2, where the authors introduce the key concepts in discrete time binomial processes. This allow them to introduce deep concepts like information and filtration in an understandable manner, while few students really understand measurability. (If you think that is a trivial idea from stochastic analysis, you may want to go for another textbook.) The binomial representation theorem is almost trivial, but show what the general version, the martingale representation theorem is all about, and why it is so useful. Similarly, the Cameron Martin Girsanov is heavy stuff in continuous time, but the idea is simple for binomial processes. I guess a lot of students will understand what the theorem i all about for the first time when they se the binomial version.

The book then goes on to generalize all these ideas to continuous time and space, but with somewhat less mathematical formalism than many other books.

Second edition please !!!
This is a great book, no doubt about it...

The basic ideas and tools of mathematical finance (Arbitrage Pricing Theory, Stochastic Calculus, Martingale Measure) are presented in a VERY conceptual way, allowing one to gain solid intuition in a field often obscured by abstraction and formalism. The description of the impact of change of measure on Brownian Motion, among others, is a little gem!

Although the level of mathematics is not overly complex, some sections still require a fair amount of "fiddling" with pen and paper to fill in the gaps and make sure the concepts are clearly grasped. That definitely demands a little mathematical maturity and assertiveness. The section on the Binomial Representation Theorem, for example, could be expended a little, with more concrete examples. But if one spends the time, goes through the book over and over looking at everything in ever finer details (...it is only 200 pages and a pretty quick read), it is immensely rewarding and provides a solid basis to tackle more complex monographs.

The only reservation is about the quick and much rougher presentation of Interest Rates Models. While the first sections on the Black-Scholes framework, Arbitrage Pricing and replication strategies for Vanilla options are very detailed, the Heat-Jarrow-Morton model could definitely be expanded (some of the results presented are not easy to derive given the material presented) and LIBOR models should be covered.

Given the success of the book, one however wonders why a second edition polishing a few sections (see Martin Baxter's website for extra material) and addressing newer developments has not been issued...