This book explains in simple settings the fundamental ideas of financial marketmodelling and derivative pricing, using the No Arbitrage Principle. Relativelyelementary mathematics leads to powerful notions and techniques – such as viability,completeness, self-financing and replicating strategies, arbitrage and equivalentmartingale measures – which are directly applicable in practice. The general methodsare applied in detail to pricing and hedging European and American options within theCox–Ross–Rubinstein (CRR) binomial tree model. A simple approach to discreteinterest rate models is included, which, though elementary, has some novel features.All proofs are written in a user-friendly manner, with each step carefully explained,and following a natural flow of thought. In this way the student learns how to tacklenew problems.