A Factor Model Approach to Derivative Pricing

James A. Primbs



Written in a highly accessible style, A Factor Model Approach to Derivative Pricing lays a clear and structured foundation for the pricing of derivative securities based upon simple factor model related absence of arbitrage ideas. This unique and unifying approach provides for a broad treatment of topics and models, including equity, interest-rate, and credit derivatives, as well as hedging and tree-based computational methods, but without reliance on the heavy prerequisites that often accompany such topics.

Key features

• A single fundamental absence of arbitrage relationship based on factor models is used to motivate all the results in the book
• A structured three-step procedure is used to guide the derivation of absence of arbitrage equations and illuminate core underlying concepts
• Brownian motion and Poisson process driven models are treated together, allowing for a broad and cohesive presentation of topics
• The final chapter provides a new approach to risk neutral pricing that introduces the topic as a seamless and natural extension of the factor model approach

Whether being used as text for an intermediate level course in derivatives, or by researchers and practitioners who are seeking a better understanding of the fundamental ideas that underlie derivative pricing, readers will appreciate the book’s ability to unify many disparate topics and models under a single conceptual theme.

Table of Contents

• Building Blocks.
• Ito's Lemma.
• Stochastic Differential Equations.
• The Factor Model Approach to Arbitrage Pricing.
• Constructing A Factor Pricing Framework.
• Equity Derivatives.
• Interest and Credit Derivatives.
• Hedging.
• The Road to Risk Neutrality.



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