ABSTRACT

Derivatives pricing begins with the assumption that the evolution of the underlying asset, be it a stock, commodity, interest rate, or exchange rate, follows some stochastic process. In this chapter, we will review a number of processes that are commonly used to model assets in different markets and explore how derivatives contracts written on these assets can be valued. In describing the many different computational methods which can be used to price derivatives and how they apply under different assumptions of an underlying stochastic process, we will often refer back to this chapter.