Recent Developments in Mathematical Finance: A Practitioner's Point of View
21 Pages Posted: 1 Jun 2006
Date Written: December 29, 2005
This article is an introduction into the principles of financial mathematics with a strong view on how the theory is actually used in practise. Using a very basic model, we explain the importance of replication of a financial contract. Afterwards, we show that the concept of replication is an integral part not only of the famous Black&Scholes model but also of more general diffusion based models.
The ideas are then applied to the pricing and hedging of options on variance. In this context, we present recent results on the modelling of the term-structure of variance swaps.
Keywords: Finance theory, Black-Scholes, Hedging, Variance Swaps
JEL Classification: G10
Suggested Citation: Suggested Citation