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This is the fourth, newly revised edition of the classical introduction to the mathematics of finance, based on stochastic models in discrete time. In the first part of the book, simple one-period models are studied, while in the second part, the idea of dynamic hedging of contingent claims is developed in a multiperiod framework.

This book is an introduction to financial mathematics.

The first part of the book studies a simple one-period model which serves as a building block for later developments. Topics include the characterization of arbitrage-free markets, preferences on asset profiles, an introduction to equilibrium analysis, and monetary measures of risk.

In the second part, the idea of dynamic hedging of contingent claims is developed in a multiperiod framework. Such models are typically incomplete: They involve intrinsic risks which cannot be hedged away completely. Topics include martingale...