ABSTRACT
This chapter considers financial markets in continuous time. In real financial markets, trading is not restricted only to take place at a limited number of time points; hence, it seems reasonable to model the financial market in continuous time where the prices are allowed to change at any time. The chapter provides a set of theoretical tools that makes it possible to determine the arbitrage-free price of the large variety of financial derivatives that are traded on the international markets. The celebrated Black & Scholes model is covered in detail, and a number of sensitivity parameters are also discussed. The chapter includes exercise problems related to the concept of continuous-time security markets.
