Financial Economics: No Arbitrage Theory and Pricing of Interest-Sensitive Instruments

Author: Zhang Lianzeng
Publisher:
Publish Date: 2006-01-01
Features: The content of this book can be divided into two parts: Arbitrage-Free Theory and Methods, and Pricing of Interest-Sensitive Financial Instruments. These two parts have some overlap (for example, the no-arbitrage assumption is almost a basic assumption when pricing interest-sensitive financial instruments), but their focuses differ. The book consists of ten chapters, with the first six chapters primarily derived from Financial Economics, and the last four chapters from Pricing of Interest-Sensitive Financial Instruments. Below is a brief introduction.
Chapter 1 focuses on introducing assets and derivative securities in financial markets, as well as briefly discussing the measurement of interest rates and the classic Markowitz model.
Chapter 2 discusses equilibrium pricing theory, which explains how buyers and sellers in the market reach equilibrium prices through transactions.
Chapter 3 discusses no-arbitrage pricing theory, showing how the price of a derivative security can be expressed as an expectation of risk-neutral probabilities (or equivalent martingale tests) given the price of the underlying security.
Chapter 4 is a specific application of Chapter 3, where some complex proofs of theorems are temporarily omitted.
Chapter 5 discusses the term structure of interest rates.
Chapter 6 covers the no-arbitrage pricing of options in continuous time.
Chapter 7 first summarizes the four types of interest rates (spot rates, forward rates, short-term rates, and yield to maturity) and their relationships, which are key to understanding the various valuation methods that follow.
Chapter 8 and Chapter 9 discuss discrete-time and single-factor models of the term structure of interest rates, respectively, as well as continuous-time single-factor models.
Chapter 10 discusses the relationship between discrete-time and continuous-time models.