Titlebook: An Intuitive Introduction to Finance and Derivatives; Concepts, Terminolog Alex Backwell Textbook 2023 The Editor(s) (if applicable) and Th

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Market Pricing and Market Efficiency,Competitive market pricing and the concept of market efficiency are addressed in this chapter. Risk and risk aversion need to be considered. The famous efficient-market hypothesis is discussed in detail.

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Modern Portfolio Theory,Modern portfolio theory is rigorously introduced. This formalises the benefits of diversification and leads to a quantitative method of optimising the tradeoff between risk and return for a particular investor.

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Asset Pricing,Models of the investment market are considered, given that individual investors are competitively seeking optimal risk–return profiles. The famous Capital Asset Pricing Model and Single-Index Model are introduced, as well as extensions.

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Arbitrage- and Model-Free Pricing Methods,The essential idea of arbitrage is discussed. Using the principle of the absence of arbitrage, some model-free derivative pricing results are attained. Forward contracts are priced, and bounds on possible option premia are derived.

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Modelling, Pricing, and Hedging,Derivative pricing and hedging are tackled, in the context of stochastic models. The canonical binomial model and Black–Scholes–Merton model are introduced and discussed. Limitations, extensions, and tradeoffs are explored.

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