Discrete Models of Financial Markets

This book explains in simple settings the fundamental ideas of financial market modelling and derivative pricing using the no-arbitrage principle. Relatively elementary mathematics leads to powerful notions and techniques - such as viability completeness self-financing and replicating strategies arbitrage and equivalent martingale measures - which are directly applicable in practice. The general methods are applied in detail to pricing and hedging European and American options within the CoxRossRubinstein (CRR) binomial tree model. A simple approach to discrete interest rate models is included which though elementary has some novel features. All proofs are written in a user-friendly manner with each step carefully explained and following a natural flow of thought. In this way the student learns how to tackle new problems.