Solutions Manual for Introduction to the Economics and Mathematics of Financial Markets

ISBN-10: 026253259X
ISBN-13: 9780262532594
Edition: 2004 (Student Manual, Study Guide, etc.)
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Description: This textbook in financial economics provides a rigorous overview of the subject that -- because of an innovative presentation -- is suitable for use with different levels of undergraduate and graduate students. Each chapter presents mathematical  More...

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Book details

Copyright year: 2004
Publisher: MIT Press
Publication date: 2/20/2004
Binding: Paperback
Pages: 63
Size: 8.50" wide x 11.00" long x 0.25" tall
Weight: 0.374

This textbook in financial economics provides a rigorous overview of the subject that -- because of an innovative presentation -- is suitable for use with different levels of undergraduate and graduate students. Each chapter presents mathematical models of financial problems at three levels of sophistication: single-period, multi-period, and continuous-time. The single-period and multi-period models require only basic calculus and an introductory probability/statistics course, while an advanced undergraduate course in probability is helpful in understanding the continuous-time models. In this way the material is given complete coverage at different levels; the less advanced student can stop before the more sophisticated mathematics and still be able to grasp the general principles of financial economics.

Benn Steil is Andr� Meyer Senior Fellow and Director of International Economics at the Council on Foreign Relations and Editor of the journal International Finance.Jaksa Cvitanic is Professor of Mathematical Finance at the California Institute of Technology and Professor of Finance at EDHEC Business School.

Fernando Zapatero is Robert G. Kirby Chair in Behavioral Finance and Professor of Finance and Business Economics at the University of Southern California.

Preface
The Setting: Markets, Models, Interest Rates, Utility Maximization, Risk
Financial Markets
Bonds
Stocks
Derivatives
Organization of Financial Markets
Margins
Transaction Costs
Summary
Problems
Further Readings
Interest Rates
Computation of Interest Rates
Present Value
Term Structure of Interest Rates and Forward Rates
Summary
Problems
Further Readings
Models of Securities Prices in Financial Markets
Single-Period Models
Multiperiod Models
Continuous-Time Models
Modeling Interest Rates
Nominal Rates and Real Rates
Arbitrage and Market Completeness
Appendix
Summary
Problems
Further Readings
Optimal Consumption/Portfolio Strategies
Preference Relations and Utility Functions
Discrete-Time Utility Maximization
Utility Maximization in Continuous Time
Duality/Martingale Approach to Utility Maximization
Transaction Costs
Incomplete and Asymmetric Information
Appendix: Proof of Dynamic Programming Principle
Summary
Problems
Further Readings
Risk
Risk versus Return: Mean-Variance Analysis
VaR: Value at Risk
Summary
Problems
Further Readings
Pricing and Hedging of Derivative Securities
Arbitrage and Risk-Neutral Pricing
Arbitrage Relationships for Call and Put Options; Put-Call Parity
Arbitrage Pricing of Forwards and Futures
Risk-Neutral Pricing
Appendix
Summary
Problems
Further Readings
Option Pricing
Option Pricing in the Binomial Model
Option Pricing in the Merton-Black-Scholes Model
Pricing American Options
Options on Dividend-Paying Securities
Other Types of Options
Pricing in the Presence of Several Random Variables
Merton's Jump-Diffusion Model*
Estimation of Variance and ARCH/GARCH Models
Appendix: Derivation of the Black-Scholes Formula
Summary
Problems
Further Readings
Fixed-Income Market Models and Derivatives
Discrete-Time Interest-Rate Modeling
Interest-Rate Models in Continuous Time
Swaps, Caps, and Floors
Credit/Default Risk
Summary
Problems
Further Readings
Hedging
Hedging with Futures
Portfolios of Options as Trading Strategies
Hedging Options Positions; Delta Hedging
Perfect Hedging in a Multivariable Continuous-Time Model
Hedging in Incomplete Markets
Summary
Problems
Further Readings
Bond Hedging
Duration
Immunization
Convexity
Summary
Problems
Further Readings
Numerical Methods
Binomial Tree Methods
Monte Carlo Simulation
Numerical Solutions of PDEs; Finite-Difference Methods
Summary
Problems
Further Readings
Equilibrium Models
Equilibrium Fundamentals
Concept of Equilibrium
Single-Agent and Multiagent Equilibrium
Pure Exchange Equilibrium
Existence of Equilibrium
Summary
Problems
Further Readings
CAPM
Basic CAPM
Economic Interpretations
Alternative Derivation of the CAPM*
Continuous-Time, Intertemporal CAPM*
Consumption CAPM*
Summary
Problems
Further Readings
Multifactor Models
Discrete-Time Multifactor Models
Arbitrage Pricing Theory (APT)
Multifactor Models in Continuous Time*
Summary
Problems
Further Readings
Other Pure Exchange Equilibria
Term-Structure Equilibria
Informational Equilibria
Equilibrium with Heterogeneous Agents
International Equilibrium; Equilibrium with Two Prices
Summary
Problems
Further Readings
Appendix: Probability Theory Essentials
Discrete Random Variables
Continuous Random Variables
Several Random Variables
Normal Random Variables
Properties of Conditional Expectations
Martingale Definition
Random Walk and Brownian Motion
References
Index

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