Chapter 13Principles of Asset Pricing
Asset pricing can be studied in two different settings: absolute pricing and relative pricing. Absolute pricing tries to explain the prices in terms of fundamental macroeconomic variables, applying utility functions and preferences. Relative pricing tries to explain the prices of a group of assets given the prices of a more fundamental group of assets.
We concentrate on relative pricing. Derivatives are assets whose payoffs are defined in terms of the payoffs of some basis assets. For example, an European call option gives the right to buy the underlying asset at the given expiration time 
at the given strike price 
. Thus, the payoff of the call option at time 
is equal to
where 
is the value of the underlying asset. We want to find a “fair price” 
for the call option, when is a previous time.
Derivatives are traded in exchanges just like stocks, ...
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