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I. Basic math.
II. Pricing and Hedging.
1. Basics of derivative pricing I.
2. Change of numeraire.
3. Basics of derivative pricing II.
4. Market model.
5. Currency Exchange.
6. Credit risk.
7. Incomplete markets.
III. Explicit techniques.
IV. Data Analysis.
V. Implementation tools.
VI. Basic Math II.
VII. Implementation tools II.
VIII. Bibliography
Notation. Index. Contents.

Pricing and Hedging.


ets on market prices are represented by options (also called "contingent claims"). Options are replicated using delta hedging. Such point of view is the basic theory. Complications arise when contingent claims depend on non-observable stochastic parameters such as probabilities of default. More complications arise when there are not enough trading instruments to hedge against some sources or types of uncertainty. The subjects of counterparty risk (a balanced position suddenly goes into red because in-the-money part of the portfolio disappears due to counterparty default) and liquidity risk (a position slides into trouble but there is no way to hedge it or get rid of it) are not yet considered in these notes.




1. Basics of derivative pricing I.
2. Change of numeraire.
3. Basics of derivative pricing II.
4. Market model.
5. Currency Exchange.
6. Credit risk.
7. Incomplete markets.

Notation. Index. Contents.


















Copyright 2007