Introduction

Options theory plays a major role in the modern theory of finance because it so clearly highlights the power of the comparison principle, based on the assumption that there are no arbitrage opportunities The previous chapter presented the theory in a simple and practical form, using the binomial lattice framework. That material is by itself sufficient to solve most options problems. There is, however, a continuous-time version of the theory and extensions of the lattice theory, which lead to new financial insights, allow consideration of more complex derivative securities, provide alternative computational methods, and prepare the way for the more complete theory of investment presented in the following chapters.

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