• TABLE of CONTENTS
    • Preface
    • Chapter 1: Theory of Arbitrage Pricing: Equity Markets
      • 1.1 A Basic One Period Model
      • 1.2 Defining the No-Arbitrage Condition
        • 1.2.1 Identifying an Arbitrage Portfolio
        • 1.2.2 Law of One Price
      • 1.3 Pricing by Replication
      • 1.4 Stochastic Discount Factors
        • 1.4.1 SDF and Risk Neutral Probability
      • 1.5 Concluding Remarks
      • 1.6 Questions and Problems
      • 1.7 Appendix
        • 1.7.1 Complete Market
        • 1.7.2 Incomplete Market
        • 1.7.3 Incomplete Market and Arbitrage Bounds
        • 1.7.4 The No-Arbitrage Condition: Geometric Exposition
    • Chapter 2: Arbitrage Pricing Applications: Equity Markets
      • 2.1 Market Structure and the Risk-Free Rate
      • 2.2 One Period Binomial Model
      • 2.3 Valuing Two Propositions
      • 2.4 Forwards: A First Look
        • 2.4.1 Forward Contract on a Security
        • 2.4.2 Forward Contract on the Exchange Rate
      • 2.5 Swaps: A First Look
        • 2.5.1 Currency Swaps
        • 2.5.2 Equity (Asset) Swaps
      • 2.6 General Valuation
        • 2.6.1 The Risk-free Rate of Interest Implicit in the Market
        • 2.6.2 The Two Propositions
        • 2.6.3 Forwards
        • 2.6.4 Swaps
      • 2.7 Concluding Remarks
      • 2.8 Questions and Problems
    • Chapter 3: Pricing by Arbitrage: Debt Markets
      • 3.1 Setting the Framework
      • 3.2 Arbitrage in the Debt Market
        • 3.2.1 Distinct Features of the Debt Market
        • 3.2.2 Defining the No-Arbitrage Condition
      • 3.3 Discount Factors
      • 3.4 Rates, Discount Factors, and Continuous Compounding
        • 3.4.1 Continuous Compounding
      • 3.5 Concluding Remarks
      • 3.6 Questions and Problems
      • 3.7 Appendix
        • 3.7.1 No-Arbitrage Condition in the Bond Market
    • Chapter 4: Fundamentals of Options
    • Chapter 5: Risk Neutral Probability and SDF
      • 5.1 Infinite vs. Finite States
      • 5.2 SDF for an Infinite Omega
      • 5.3 Risk Neutral Probability and SDF
      • 5.4 A First Look at Stock Prices
      • 5.5 The Distribution of the Rate of Return
      • 5.6 Paths of the Price Process
      • 5.7 Specifying a Risk Neutral Probability
      • 5.8 Lognormal Distributions and SDF
      • 5.9 The Stochastic Discount Factor Function
      • 5.10 Concluding Remarks
      • 5.11 Questions and Problems
    • Chapter 6: Valuation of European Options
      • 6.1 Valuing a Call Option
      • 6.2 Valuing a Put Option
      • 6.3 Combinations across Time
      • 6.4 Dividends and Option Pricing
      • 6.5 Volatility and Implied Volatility
        • 6.5.1 Estimating Volatility from Historical Data
        • 6.5.2 Implied Volatility
      • 6.6 Concluding Remarks
      • 6.7 Questions and Problems
      • 6.8 Appendix
        • 6.8.1 Estimating Implied Volatility Using Trial and Error
    • Chapter 7: Sensitivity Measures
      • 7.1 The Theta Measure
      • 7.2 The Delta Measure
      • 7.3 The Gamma Measure
      • 7.4 The Vega Measure
      • 7.5 The rho Measure
      • 7.6 Concluding Remarks
      • 7.7 Questions and Problems
      • 7.8 Appendix
        • 7.8.1 Derivation of Sensitivity Measures
        • 7.8.2 Sensitivity of Other Options
        • 7.8.3 Signs of the Sensitivities
    • Chapter 8: Hedging with the Greeks
      • 8.1 Hedging: the General Philosophy
      • 8.2 Delta Hedging
        • 8.2.1 Solving for a Delta Neutral Portfolio
      • 8.3 Delta Neutral Portfolios and the Defintion of Delta
      • 8.4 General Hedging
      • 8.5 Optimizing Hedged Portfolios
      • 8.6 Concluding Remarks
      • 8.7 Questions and Problems
    • Chapter 9: The Term Structure its Estimation & Smoothing
      • 9.1 The Term Structure of Interest Rates
        • 9.1.1 Zero Coupon, Spot and Yield Curves
      • 9.2 Smoothing of the Term Structure
        • 9.2.1 Smoothing and Continuous Compounding
      • 9.3 Forward Rates
        • 9.3.1 Forward Rate: A Classical Approach
        • 9.3.2 Forward Rate: A Practical Approach
      • 9.4 A Variable Rate Bond
      • 9.5 Concluding Remarks
      • 9.6 Questions and Problems
      • 9.7 Appendix
        • 9.7.1 Theories of the Shape of the Term Structure
        • 9.7.2 Approximating Functions
    • Chapter 10: Forwards, Eurodollars and Futures
      • 10.1 Forward Contracts: A Second Look
      • 10.2 Valuation of Forward Contracts Prior to Maturity
      • 10.3 Forward Price of Assets that Pay Known Cash Flows
        • 10.3.1 Forward Contracts, Prior to Maturity, of Assets that Pay Known Cash Flows
        • 10.3.2 Forward Price of a Stock that Pays A Known Dividend Yield
      • 10.4 Eurodollar Contracts
        • 10.4.1 Forward Rate Agreements (FRA)
      • 10.5 Futures Contracts: A Second Look
      • 10.6 Deterministic Term Structure (DTS)
      • 10.7 Futures Contracts in a DTS Environment
      • 10.8 Concluding Remarks
      • 10.9 Questions and Problems
    • Chapter 11: Swaps: A Second Look
      • 11.1 A Fixed-for-Float Swap
        • 11.1.1 Valuing an Existing Swap
      • 11.2 Currency Swaps
      • 11.3 Commodity and Equity Swaps
      • 11.4 Forwards and Swaps: A Visualization
      • 11.5 Concluding Remarks
      • 11.6 Questions and Problems
    • Chapter 12: American Options
      • 12.1 American Call Options
        • 12.1.1 Arbitrage Bounds
        • 12.1.2 Early Exercise Decision
      • 12.2 American Put Options
        • 12.2.1 Arbitrage Bounds
        • 12.2.2 Early Exercise Decision
      • 12.3 Put Call Parity
      • 12.4 The Effect of Dividends
        • 12.4.1 A Call Option
        • 12.4.2 A Put Option
      • 12.5 Concluding Remarks
      • 12.6 Questions and Problems
    • Chapter 13: The Binomial Model I
    • Chapter 14: The Binomial Model II
      • 14.1 Binomial Model and the Black-Scholes Formula
        • 14.1.1 Binomial vs. Lognormal
        • 14.1.2 Numerical Implementations
        • 14.1.3 The Effect of Dividends
      • 14.2 Risk Neutral Probabilities and Price Processes
      • 14.3 Futures and Forwards: A Symbolic Example
      • 14.4 Brownian Motion
      • 4.5 Concluding Remarks
      • 14.6 Questions and Problems
      • 14.7 Appendix
        • 14.7.1 The Black-Scholes Formula as a Limit of the Binomial Formula
    • Chapter 15: A Second Look at the Black-Scholes Formula
      • 15.1 An Overview
      • 15.2 The Price Process: A Second Look
        • 15.2.1 Stochastic Evolution: The Discrete Case
      • 15.3 Simulation of Stochastic Evolution
      • 15.4 Stochastic Evolution: Toward a continuous Model
      • 15.5 Ito's Lemma
        • 15.5.1 Heuristic Proofs of Ito's Lemma
        • 15.5.2 Examples Utilizing Ito's Lemma
      • 15.6 The Black-Scholes Differential Equation
        • 15.6.1 A Second Derivation
      • 15.7 Reconciliation with Risk-Neutral Valuation
      • 15.8 American vs. European
      • 15.9 Concluding Remarks
      • 15.10 Questions and Problems
      • 15.11 Appendix
        • 15.11.1 A Change Over an Instant
        • 15.11.2 The Limit of a Random Variable
        • 15.11.3 A More Rigorous Insight into Ito's Lemma
    • Chapter 16: Other Types of Options
      • 16.1 American Options, Dividend-paying Stocks and Binomial Models
      • 16.2 Options on Indixes, Foreign Currency and Futures
        • 16.2.1 Stock Index Options
        • 16.2.2 Currency Options
        • 16.2.3 Options on Futures Contracts
      • 16.3 Examples of Exotic Options
        • 16.3.1 Binary (Digital) Options
        • 16.3.2 Combinations of Binary and Plain Vanilla Options
        • 16.3.3 Gap Options
        • 16.3.4 Paylater (cash on delivery) Options
      • 16.4 Interest Rate Derivatives
        • 16.4.1 Black's Model
        • 16.4.2 Black, Derman and Toy Model
      • 16.5 Concluding Remarks
      • 16.6 Questions and Problems
    • Chapter 17: The End or the Beginning
    • References