Mathematical Techniques in Finance : Tools for Incomplete Markets
Author: Ales Cerny
List Price: $39.95
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ISBN: 0691088071
Publisher: Princeton Univ Pr (03 November, 2003)
Sales Rank: 35,663
Average Customer Rating: 5 out of 5
Customer Reviews
Rating: 5 out of 5
Very good coverage, practical orientation
Consider first, this book's subtitle, "Tools for Incomplete Markets." A "complete market" (the kind assumed by the Black-Scholes-Merton model) is one in which any derivative product can be dynamically replicated by means of cash and the underlying asset. An incomplete market, then, is one is which the world of derivatives and their underlyings do not match each other in the point-by-point replicable manner implied by that definition of completeness. This failure to match makes for a necessary imperfection in hedging. That, of course, is the real world, where traders practice, as Scholes and Merton famously discovered in Greenwich, CT not long ago!A variety of illustrations of this practical emphasis might be adduced. In the preface, for example, Dr. Cernư tells us frankly that in his experience "is it hard to understand the Itô calculus, but it is possible to get used to it and to apply it quickly and consistently...." [italics in original.]
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