ABSTRACT
The first half of this chapter describes a general continuous-time model for securities market, parallel to the discrete-time counterpart discussed in Chapter 5. Similar limiting argument to the ones given so far can be applied for those results. The Black-Scholes model is discussed in detail as an application of the no-arbitrage pricing theorem. The remaining part of this chapter concerns important pricing methods, risk-neutral and forward-neutral methods, together with their applications for the pricing of contingent claims. The reader should consult any textbooks of finance such as Merton (1990), Neftci (1996), Bjo¨rk (1998), and Mikosch (1998) for discussions of continuous-time securities market models.
