| Risk-Neutral Valuation: Pricing and Hedging of Financial Derivatives (Springer Finance) |  | Authors: Nicholas H. Bingham, Rudiger Kiesel
Publisher: Springer
List Price: $79.95
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Rating:  4 reviews
Media: Hardcover
Edition: Corrected
Pages: 298
Number Of Items: 1
Shipping Weight (lbs): 1.7
Dimensions (in): 9.3 x 6.3 x 1
ISBN: 1852330015
Dewey Decimal Number: 332.015118
EAN: 9781852330019
ASIN: 1852330015
Publication Date: October 25, 2001
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Product Description
Written by Nick Bingham, Chairman and Professor of Statistics at Birkbeck College, and Rdiger Kiesel, an "up-and-coming" academic, Risk Neutrality will benefit the Springer Finance Series in many ways. It provides a valuable introduction to Mathematical Finance for Graduate Students, and also comprehensive coverage of Financial subjects which should also stimulate practitioners of the subject. Based on a graduate course given to practitioners of Finance, the book identifies a clear gap in the market of Mathematical Finance. The authors approach is simple and designed to accommodate a wide audience. Springer Finance is a new programme of books aimed at students, academics and practitioners working on increasingly technical approaches to the analysis of financial markets.
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| Customer Reviews:
It shows that "no arbitrage" is the basis of pricing in finance November 6, 2007
Mauricio Labadie (Paris, France)
2 out of 2 found this review helpful
I am a PhD student in Applied Math but with only a basic background on Probability (I am on the side of Analysis, Differential Equations and Topology) and I was looking for a comprehensible textbook on options and derivatives with a probabilistic approach. I wanted a readable, preferably self contained text in pricing financial products with both discrete and continuous stochastic processes, and this text was the right choice.
This text is self contained: it gives you all the probability background you need in order to understand stochastic processes in both discrete and continuous time. True, you need basic background on probability but just an undergraduate course.
The authors use thoroughly the Arbitrage principle just as a physicist uses Newton's law: they build up portfolios and then they use arbitrage (like F=ma) to derive the solution. This idea of "no arbitrage" as the basis of finance can be contested but it is the standard way to proceed when valuating derivatives. I have read several books on derivatives and this was the first one that taught me the very principle behind all the finance: "the fair price of a product is such that there is no free lunch without taking risks", or as the authors say, one should discount everything and take expected values under risk neutral probabilities.
The book proves everything but the huge and technical theorems like e.g. Ito's, Feynman-Kac's or Girsanov's. It is OK since the emphasis is on the relevant concepts and their correct use and interpretation and not on hard mathematics: the heavy proofs and constructions are outlined and references are mentioned.
If you are interested in the hard proofs I suggest Oksendal "Stochastic Differential Equations", and if you are looking for a non probabilistic approach of pricing derivatives I strongly recommend Wilmott "Quantitative finance", which is PDE based.
 Good mix December 3, 2001
5 out of 5 found this review helpful
I have read this book... from a learning perspective of trying to learn what the theory behind options pricing is it is a great book. A lot of more recent topics are missing, but as a starter book for those who already price options/work in the industry without having learned all the theory (or in my case forgotten what they learned in school) it is a great read and a great reference.
Excellent and brief compendium of financial theory October 18, 2000
Ned Ilincic (New York, NY, USA)
10 out of 11 found this review helpful
This book covers quite a few fields (axiomatic probability, stochastic processes, financial theory) to the extent that they relate to valuation of securities. Naturally, the scope of coverage in such a brief tome (< 300 p.) is limited. It is written clearly and with precision, with sufficient number of exercises provided at chapters' ends. I would say that it goes to greater depth than Neftci, and is far more rigorous than Wilmott. Incomparably easier to understand than Merton. The only shorcomings I can find are relative paucity of examples and inadequate Index.
Probabilistic approach to derivatives valuation April 24, 2000
Gerson Francisco (Brasil)
104 out of 105 found this review helpful
The language of financial derivatives is, arguably, the language of the modern theory of martingale stochastic processes. In this approach pricing contingent claims is reduced to finding an "equivalent martingale measure". Practitioners would think in terms of risk adjusted or risk neutral valuation. To understant this topic from an abstract and rigorous point of view is a daunting task restricted to a relatively small elite. For those seeking to learn the mechanics of this discipline a good foundation is well provided by the texts from Hull, Options, Futures and Other Derivatives, as well as Jarrow & Turbull, Derivatives Securities. These books present the intuition behind the formulas and how to use them in practical situations, but they do not show where the formulas come from and much less the mathematics necessary to prove them. Before the book under review was published, this task was attempted by other authors with mixed degrees of success. Here we briefly mention three of them. Baxter and Rennie's Financial Calculus (233 pages) is written in an informal fashion about deep mathematics and one has the feeling that the essence of the topics covered can be grasped and understood from it. However, behind this innocent style there is a huge amount of sophisticated machinery that, in my opinion, should have in part been presented in more detail. An instructor is left with the feeling that it could have been much more profitable to work a bit harder on the students and give them a more complete picture of the theory. Next comes Neftci's Mathematics of Financial Derivatives (352 pages). Its language is more accessible than Baxter and it gives a more detailed and extensive description on most topics. Mathematically, though, it falls short of current usage and rigour. The book by Musiela & Rukowski, Martingale Methods in Financial Modelling (511 pages), is far more difficult than any of these and should be read and understood only by a few. It requires previous knowledge of stochastic processes at the level of, for example, Probability with Martingales by D. Williams. The book under review is an excellent text for courses and for individual readers with a modest background in probability. There is no compromise with mathematical language and concepts. They are presented precisely and illustrated by examples without the burden of more technical theorem-proving approach in advanced mathematical texts. After introducing the idea of derivatives and risk-neutral valuation, it gives a summary of modern probability theory including measure, integral, conditional expectation, modes of convergence, characteristic functions and the Central Limit Theorem. This sets the framework for the rest of the book. Stochastic processes and finance in discrete time are not pre-requites for the much more complicated continuous time but serve as a pedagogical preparation for it. The Third and Fourth Chapters are dedicated to the discrete case and key concepts are carefully analysed. Information and filtrations are discussed as well as the important random walk processes as a motivation for the Brownian Motion. The culmination of these efforts is the proof of the Fundamental Theorem of Asset Pricing: in an arbitrage-free complete market there exists a unique equivalent martingale measure. A very readable discussion on binomial trees is given, including the proof that in the limit of small time increments one recovers from it the usual Black-Scholes formula for a call option. Chapters Five and Six are dedicated to stochastic processes and finance in continuous time. This includes filtrations, a sketch for the construction of Brownian Motion, quadratic variation of Brownian Motion, stochastic integrals and Ito calculus, stochastic differential equations, etc. A continuous version of the Fundamental Theorem is discussed but not proven. The main formula for risk-neutral valuation in terms of expected values is proven. A general result about the relationship with other approaches is that solutions to partial differential equations have a stochastic representation in terms of expected values (Feynman-Kac Formula). On p. 211 a discussion is presented regarding our knowledge concerning continuous time securities market in comparison to the discrete case. If you are really interested in understanding the probabilistic foundations of modern financial derivatives theory, please consider seriously this book. Another reference, in the same spirit that I recommend is the excellent notes from Shreve, Stochastic Calculus and Finance, which is not yet in book form. After reading the text by Bingham and Kiesel you will gain a solid background well worth the effort and will be able to read profitably most of the contemporary texts and articles on this subject.
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