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The equivalent martingale measure: an introduction to pricing using expectations.

Authors
  • Magdon-Ismail, M
Type
Published Article
Journal
IEEE transactions on neural networks / a publication of the IEEE Neural Networks Council
Publication Date
Jan 01, 2001
Volume
12
Issue
4
Pages
684–693
Identifiers
DOI: 10.1109/72.935082
PMID: 18249904
Source
Medline
License
Unknown

Abstract

We provide a self contained introduction to the risk neutral or martingale approach to the pricing of financial derivatives, while assuming no financial background. This approach to pricing provides a rich source of problems ideally suited to the application of Monte Carlo methods, thus forming a bridge between computational finance and some of the well developed tools available to engineers and scientists. We illustrate the power of the martingale approach by using it to develop the price of the European call option using only elementary methods and briefly discuss the pricing of the American put option as well as interest rate derivatives.

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