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Advanced Quantitative Finance with C++ by Alonso Peña Ph.D

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Chapter 2. Mathematical Models

In the previous chapter, we described the Bento Box template as a methodology for structuring our approach to price financial derivatives. In the context of the Bento Box template, this chapter corresponds to box 2—mathematical models. Here we review some of the key mathematical models used in the financial derivatives markets today to describe the behavior of the underlying. In particular, the future evolution of the underlying. The following are the examples of these underlyings:

  • An equity or stock
  • An exchange rate
  • An interest rate
  • A credit rating

Equity

In the equity asset class, the underlying is the price of a company stock. For instance, the current price of one share of Vodafone PLC (VOD.L) as quoted in the London ...

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