Assets traded in financial markets fall into the following main categories:
• stocks (equity in a corporation or business).
• bonds (financial contracts issued by governments and corporations).
• currencies (traded on foreign exchanges).
• commodities (goods, such as oil, wheat, or electricity).
• derivatives.
A derivative is a financial instrument whose value is based on one or more underlying assets. Such instruments provide a way for investors to reduce the risks associated with investing by locking in a favorable price. The most common derivatives are forwards, futures, and options. In this chapter, we show how the simple assumption of no-arbitrage may be used to derive fundamental properties regarding ...
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