Abstract
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.
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© 2011 Springer-Verlag Italia
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Pascucci, A. (2011). Continuous market models. In: PDE and Martingale Methods in Option Pricing. Bocconi & Springer Series. Springer, Milano. https://doi.org/10.1007/978-88-470-1781-8_10
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DOI: https://doi.org/10.1007/978-88-470-1781-8_10
Publisher Name: Springer, Milano
Print ISBN: 978-88-470-1780-1
Online ISBN: 978-88-470-1781-8
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