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Probability and statistics

Definition of probability

The main concepts of probability

The concept of probability distribution

Types of probability distribution

Binomial distribution

Normal distribution

Log-normal distribution

Other probability distributions

Binomial trees

INTRODUCTION

As we saw in Chapter 9, pricing derivatives, particularly securities with embedded optionality, requires assumptions on their future behaviour. Whether it is just the range of final values the security is likely to have, the paths it took to get there, or the future behaviour of several variables that impact on the value of derivative, they all require the use of probability and statistics. Hence this chapter is devoted to the main concepts of probability, ...

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