ABSTRACT
In Chapter 6, we introduce the pricing of financial derivatives. Derivatives are financial instruments and whose values are derived from the other basic assets called underlying assets. This property leads to the name of the "Derivative". In the finance market, derivatives provide various usefulness such that they often mitigate risk or provide opportunities of large profit with less capital. Thus, along with asset pricing, derivative pricing is an important subject in finance theory. Derivative pricing usually starts from modelling the dynamics of safe and risky assets. The problem is how to model the dynamics of these assets. One of the most intuitive methods for this is to adopt the binomial model. Thus, this chapter focuses on the binomial model in the first section as an introduction of the derivative pricing. Finally, we introduce the trinomial model as an extended version of the binomial model.
