Introduction to Derivatives Pricing-Lectures 6, 7
LECTURE-6
Valuation. We begin with valuing a Perpetual annuity, i.e. an annuity
where the holder gets a specific amount periodically for ever. Early Dutch
and in general European government securities were

Lecture 3
A nancial security is a nancial contract with a legal binding. Broadly
nancial contracts are about an ownership, debt agreement or a right to
ownership or debt agreement.
A security can be broadly classied into three.
(i) Equities/ stocks:(owner

INTRODUCTION TO DERIVATIVES PRICING
LECTURES: 8
LECTURE-8
DERIVATIVES
Derivatives are nancial securities whose payos are explicitly given by
the value of some other underlying asset.
Important examples are Forward contracts, Futures contracts, Options,
Sw

INTRODUCTION TO DERIVATIVES PRICING
LECTURES: 9, 10, 11
LECTURE-9
Now we assume the underlying asset has carrying cost c(k) for the period
[k, k + 1) , k = 0, 1, , M payable at the beginning of the period.
M is the number of periods until maturity T of th

INDIAN INSTITUTE OF TECHNOLOGY, BOMBAY
Department of Mathematics
SI 527 (Introduction to Derivatives Pricing)
Tutorial Sheet-I
(, F, P ) always denote a probability space. Student should clearly
know its meaning.
All random variables are defined on (, F

INDIAN INSTITUTE OF TECHNOLOGY BOMBAY
Department of Mathematics
SI 527 (Introduction to Derivatives Pricing)
Tutorial Sheet no. 2
Q.1 An young couple has made a nonrefundable deposit of the rst months rent $ 1000, on a
6-month apartment lease1 . The next

INDIAN INSTITUTE OF TECHNOLOGY, BOMBAY
Department of Mathematics
SI 527 (Introduction to Derivatives Pricing)
Tutorial Sheet no. 3
Q.1 Show that yield is well defined for any coupon bearing bond.
Q.2 Consider two 5-year bonds issued by the same firm. Both

INDIAN INSTITUTE OF TECHNOLOGY, BOMBAY
Department of Mathematics
SI 527 (Introduction to Derivatives Pricing)
Tutorial Sheet no. 4
Q.1 An investor is short selling a 2-year 10 % bond currently selling at Rs. 98 invest the money
received in the bank for an

Probability Essentials
1
Probability Space
We start with the denition of a probability space (, F, P ). As we know,
for us is the sample space coming from a random experiment, F is a
-eld of events, i.e. F P() satisfying the following properties.
(i) F.
(