Financial Calculus: An Introduction to Derivative Pricing

by Martin Baxter, Andrew J.O. Rennie

The first rigorous and accessible account of the mathematics behind the pricing, construction, and hedging of derivative securities, this book explains, with mathematical precision and in a style tailored for market practitioners, such key concepts as martingales, change of measure, and the Heath-Jarrow-Morton model. A full Glossary of probabilistic and financial terms is provided along with graphical illustrations with realistic data.

Genres: Finance, Mathematics, Economics, Textbooks, Reference, Nonfiction

233 pages, Hardcover

First published September 19, 1996

Reviews

[Austin · Rating 3 out of 5]

This is a very nice, reasonably concise little monograph. While some background knowledge of options and Black-Scholes is appropriate, this is a fairly self-contained introduction to risk-neutral pricing. Honestly, while I didn't love this book, it should still be considered a must-read simply because of the paucity of better offerings.

[Jeremy Lo · Rating 4 out of 5]

A concise introduction to asset pricing by equivalent martingale measures. Although not necessary, some background understanding in Black-Scholes via PDE method would be helpful. The book focuses on motivating the use of key concepts and developing a good "intuition" on why risk-neutral pricing works, rather than a rigorous mathematical derivation - a good place to start for students.

[Szymon Woźniak · Rating 4 out of 5]

The first few chapters are great and intuitive introduction to stochastic calculus and basics of derivative pricing. Unfortunately, the rest of the book seems to be in rush where increasingly complex models are thrown to the reader without much explanation and that part - at least for myself- was hard to follow. Overall however a worthy read.

[Taylor · Rating 5 out of 5]

This is the most intuitive and concise introduction to asset pricing via equivalent martingale measures that I've yet encountered. The real value of this book lies in how successfully it motivates each of the pieces of theoretical machinery used in risk-neutral asset pricing: equivalent martingale measures, Ito Calculus, and so on. This book will be especially useful to people with a background in economic theory who are having trouble making the conceptual link between risk aversion, subjective-expected utility theory and pricing via equivalent martingale measures. Unfortunately, this isn't self-contained, and readers will need to consult other sources to get a full rigorous introduction to the topics of measure theory, martingale theory, and rigorous probability theory. Without a proper background to these topics, certain intuitive statements made in this book can be misleading. For example, in the chapter that introduces the binomial asset pricing model, the authors describe filtrations as being the history of the price process up to a given point in time. While this is true for a simple binomial model, in continuous time filtrations have a much more subtle nature -- this is where a suitable background in measure theory comes in handy. For these topics, in conjunction with this text I have used the introductory chapters of Bingham and Kiesel's "Risk-Neutral Valuation", Schilling's "Measures, Integrals and Martingales" and Rosenthal's "A First Look at Rigorous Probability Theory."

[Neal Groothuis · Rating 5 out of 5]

This is concise without being terse, clear, and comprehensive. I could have replaced several of my grad school classes with a self-directed course of study using this book. (And, retrospectively, I probably should have.)