An Introduction to Exotic Option Pricing

Chapter 2

Mathematical Preliminaries

This chapter is a review of the mathematical details that underpin many of the topics of the previous chapter. These include elements of probability theory, stochastic calculus and other issues that play an important role in the development of financial mathematics in general, and the Black–Scholes and EMM methods in particular. For a more detailed account on stochastic calculus and sde’s, the reader is referred to the texts of Lamberton and Lapeyre [51], Karatzas and Shreve [41] and Øksendal [60]. A recent very readable text that is not too technical, and hence in the same vein as this book, is that by Wiersema [76].

Another useful reference which covers almost everything in this chapter, and the previous ...