Financial Derivatives

Starting from basic economic principles of risk, Jamil Baz and George Chacko build up techniques for pricing and hedging derivatives. The first chapter gives a heuristic treatment of random calculus, covering random walks, volatility and time, Ito's lemma and geometric Brownian motion. The second develops pricing through the stochastic discount factor, or pricing kernel, and applies it to conventional and exotic derivatives, while the third turns to interest rate markets, including bonds, swaps, factor models and term structure consistent models. A fourth chapter treats jump and mean-reverting processes along with martingale techniques, Kolmogorov equations, stochastic control and partial differential equations. Its intended readers are finance and economics graduate students and financial analysts with a grounding in calculus, probability and statistics.

Nassim Nicholas Taleb wrote that the copy Baz gave him sat unread until a problem with risk-neutral pricing and the Girsanov theorem sent him to it, and that he should have read it earlier.