O'Reilly logo

Risk Neutral Pricing and Financial Mathematics: A Primer by John L. Teall, Peter M. Knopf

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter 6

Fundamentals of Stochastic Calculus

Chapter 6 extends coverage of stochastic processes needed to develop the financial models, including those that derive from stochastic differential equations. The differential of a stochastic process and stochastic integration is defined. Relevant properties and essential theorems concerning these two operations are covered. The Radon–Nikodym derivative is covered in detail, with applications to both discrete binomial probability measures and continuous normal densities. The chapter presents essential tools for pricing securities following continuous stochastic process, including the Cameron–Martin–Girsanov theorem, the martingale representation theorem, and Itô’s lemma. Using Itô’s lemma, the solution ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required