Financial Economics (Arbitrage Theory and Pricing of Interest Rate 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 (e.g., 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 explaining market interest rate measurement and the classic Markowitz model.
Chapter 2 discusses equilibrium pricing theory, which demonstrates 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 is about continuous-time option no-arbitrage pricing.
Chapter 7 first summarizes four types of interest rates (spot rates, forward rates, short-term rates, and yield to maturity) and their relationships. These different types of interest rates 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.