The equivalent martingale measure: an introduction to pricing using expectations

Author

Magdon-Ismail, Malik

Author_Institution

Dept. of Comput. Sci., Machine & Comput. Learning Group, Troy, NY, USA

Volume

12

Issue

4

fYear

2001

fDate

7/1/2001 12:00:00 AM

Firstpage

684

Lastpage

693

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

Keywords

Monte Carlo methods; economic cybernetics; finance; stochastic processes; American put option; European call option; computational finance; equivalent martingale measure; expectations; financial derivatives; interest rate derivatives; pricing; risk neutral approach; Bonding; Bridges; Computational modeling; Economic indicators; History; Instruments; Monte Carlo methods; Power engineering computing; Pricing; Stochastic processes;

fLanguage

English

Journal_Title

Neural Networks, IEEE Transactions on

Publisher

ieee

ISSN

1045-9227

Type

jour

DOI

10.1109/72.935082

Filename

935082