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A Factor Model Approach to Derivative Pricing.


A Factor Model Approach to Derivative Pricing

James A. Primbs

CRC Press


271 pages



This book explains the conceptual foundations of derivative pricing from a single, unified perspective: the factor model perspective. It shows that the stochastic differential equation models used in derivative pricing can be interpreted as linear factor models that relate sources of risk to returns, illustrating how Ross' Arbitrage Pricing Theory leads to the absence of arbitrage equations that govern the pricing of derivatives. It describes the basic math required for derivative pricing and financial engineering, including stochastic differential equation models; Ito's lemma for Brownian motion and Poisson process driven stochastic differential equations; stochastic differential equations that have closed form solutions; the factor model approach to arbitrage pricing; constructing a factor model pricing framework; its application to equity derivatives and interest rate and credit derivatives; approaches to hedging; computational methods used in derivative pricing from the factor model perspective; and the concept of risk neutral pricing. ([umlaut] Ringgold, Inc., Portland, OR)

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Article Type:Book review
Date:Feb 1, 2017
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