Binomial Models in Finance / Edition 1

by John van der Hoek, Robert J Elliott

Overview

This book describes the modelling of prices of financial assets in a simple d- crete time, discrete state, binomial framework. By avoiding the mathematical technicalities of continuous time finance we hope we have made the material accessible to a wide audience. Some of the developments and formulae appear here for the first time in book form. We hope our book will appeal to various audiences. These include MBA students,upper level under graduate students, beginning doctoral students,qu- titative analysts at a basic level and senior executives who seek material on new developments in finance at an accessible level. The basic building block in our book is the one-step binomial model where a known price today can take one of two possible values at a future time, which might, for example, be tomorrow, or next month, or next year. In this simple situation “risk neutral pricing” can be defined and the model can be applied to price forward contracts, exchange rate contracts and interest rate derivatives. In a few places we discuss multinomial models to explain the notions of incomplete markets and how pricing can be viewed in such a context, where unique prices are no longer available. The simple one-period framework can then be extended to multi-period m- els.The Cox-Ross-Rubinstein approximation to the Black Scholes option pr- ing formula is an immediate consequence. American, barrier and exotic - tions can all be discussed and priced using binomial models. More precise modelling issues such as implied volatility trees and implied binomial trees are treated, as well as interest rate models like those due to Ho and Lee; and Black, Derman and Toy.

Product Details

ISBN-13:	9780387258980
Publisher:	Springer New York
Publication date:	12/08/2005
Series:	Springer Finance
Edition description:	2006
Pages:	306
Product dimensions:	6.10(w) x 9.25(h) x 0.03(d)

Table of Contents

The Binomial Model for Sk Options.- The Binomial Model for Other Contracts.- Multiperiod Binomial Models.- Hedging.- Forward and Futures Contracts.- American and Exotic Option Pricing.- Path-Dependent Options.- The Greeks.- Dividends.- Implied Volatility Trees.- Implied Binomial Trees.- Interest Rate Models.- Real Options.- The Binomial Distribution.- An Application of Linear Programming.- Volatility Estimation.- Existence of a Solution.- Some Generalizations.- Yield Curves and Splines.

Editorial Reviews

From the reviews:

"Overall, this is an excellent 'workbook' for practitioners who seek to understand and apply financial asset price models by working through a comprehensive collection of both theoretical and dataset-driven numerical examples, follwoed by up to 15 end-of-chapter exercises with elaborated parts taht help clarify the mathematical and computational aspects of the chapter." Wai F. Chiu for the Journal of the American Statistical Association, December 2006

"This is a textbook on the mathematics of pricing and hedging financial derivatives with discrete shastic models. It is directed towards a readership that is interested in the principles and applications of mathematical finance … . A nice feature is the very clear descriptions of financial terms, which, on the one hand, are often missing in more mathematics-oriented books and, on the other hand, can be somewhat imprecise in textbooks aiming at the business community." (A. Schied, Short Book Reviews, Vol. 26 (2), 2006)

"The book is written by leading specialists in modern shastic financial modeling. … The book is well written, with a good balance between mathematical tools and arguments and financial topics. It is nice to see proofs of several important properties of financial characteristics and rules for option pricing. Specific numerical examples are given to illustrate ideas and rules. … Without any reservations the book can be strongly recommended not only to institutional libraries but also to anybody working or with interests in shastic financial modeling." (Jordan M. Stoyanov, Zentralblatt MATH, Vol. 1107 (9), 2007)

From the Publisher