Factor Model Approach to Derivative Pricing

Written in a highly accessible style, A Factor Model Approach to Derivative Pricing lays a clear and structured foundation for the pricing of derivative securities based upon simple factor model related absence of arbitrage ideas. This unique and unifying approach provides for a broad treatment of topics and models, including equity, interest-rate, and credit derivatives, as well as hedging and tree-based computational methods, but without reliance on the heavy prerequisites that often accompany such topics.
Key features

A single fundamental absence of arbitrage relationship based on factor models is used to motivate all the results in the book

A structured three-step procedure is used to guide the derivation of absence of arbitrage equations and illuminate core underlying concepts

Brownian motion and Poisson process driven models are treated together, allowing for a broad and cohesive presentation of topics

The final chapter provides a new approach to risk neutral pricing that introduces the topic as a seamless and natural extension of the factor model approach

Whether being used as text for an intermediate level course in derivatives, or by researchers and practitioners who are seeking a better understanding of the fundamental ideas that underlie derivative pricing, readers will appreciate the book‘s ability to unify many disparate topics and models under a single conceptual theme.
James A Primbs is an Associate Professor of Finance at the Mihaylo College of Business and Economics at California State University, Fullerton.