1Arbitrage theory
In this chapter, we study the mathematical structure of a simple one-period model of a financial market. We consider a finite number of assets. Their initial prices at time t = 0 are known, their future prices at time t = 1 are described as random variables on some probability space. Trading takes place at time t = 0. Already in this simple model, some basic principles of mathematical finance appear very clearly. In Section 1.2, we single out those models which satisfy a condition of market efficiency: There are no trading opportunities which yield a profit without any downside risk. The absence of such arbitrage opportunities is characterized by the existence of an equivalent martingale measure. Under such a measure, discounted ...
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