Continuous market models
In this chapter we present the theory of derivative pricing and hedging for continuous-time diffusion models. As in the discrete-time case, the concept of martingale measure plays a central role: we prove that any equivalent martingale measure (EMM) is associated to a market price of risk and determines a risk-neutral price for derivatives, that avoids the introduction of arbitrage opportunities. In this setting we generalize the theory in discrete time of Chapter 2 and extend the Markovian formulation of Chapter 7, based upon parabolic equations.
KeywordsOption Price Risky Asset Implied Volatility Stochastic Volatility Model Underlying Asset
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