© 2004

Option Theory with Stochastic Analysis

An Introduction to Mathematical Finance


  • Very concise, requires only basic mathematical skills

  • Describes the basic assumptions (empirical finance) underlying option theory

  • Includes a big section on pricing using both pde-approach and martingale approach (stochastic finance)

  • Presents the two main approaches for numerical computation of option prices (computational finance)

  • Can be used at introductory level at universities, with exercises after each chapter

  • Potential interest for the German actuaries and actuarial training


Part of the Universitext book series (UTX)

Table of contents

  1. Front Matter
    Pages I-X
  2. Fred Espen Benth
    Pages 1-10
  3. Fred Espen Benth
    Pages 33-52
  4. Fred Espen Benth
    Pages 53-97
  5. Back Matter
    Pages 121-166

About this book


The objective of this textbook is to provide a very basic and accessible introduction to option pricing, invoking only a minimum of stochastic analysis. Although short, it covers the theory essential to the statistical modeling of stocks, pricing of derivatives (general contingent claims) with martingale theory, and computational finance including both finite-difference and Monte Carlo methods. The reader is led to an understanding of the assumptions inherent in the Black & Scholes theory, of the main idea behind deriving prices and hedges, and of the use of numerical methods to compute prices for exotic contracts. Finally, incomplete markets are also discussed, with references to different practical/theoretical approaches to pricing problems in such markets.
The author's style is compact and to-the-point, requiring of the reader only basic mathematical skills. In contrast to many books addressed to an audience with greater mathematical experience, it can appeal to many practitioners, e.g. in industry, looking for an introduction to this theory without too much detail.
It dispenses with introductory chapters summarising the theory of stochastic analysis and processes, leading the reader instead through the stochastic calculus needed to perform the basic derivations and understand the basic tools
It focuses on ideas and methods rather than full rigour, while remaining mathematically correct.
The text aims at describing the basic assumptions (empirical finance) behind option theory, something that is very useful for those wanting actually to apply this. Further, it includes a big section on pricing using both the pde-approach and the martingale approach (stochastic finance).
Finally, the reader is presented the two main approaches for numerical computation of option prices (computational finance). In this chapter, Visual Basic code is supplied for all methods, in the form of an add-in for Excel.
The book can be used at an introductory level in Universities. Exercises (with solutions) are added after each chapter.


Analysis Gaussian distribution Measure Normal distribution Option Pricing Options Probability theory Statistical Analysis modeling

Authors and affiliations

  1. 1.Department of MathematicsCentre of Mathematics for Applications University of OsloOsloNorway

Bibliographic information

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From the reviews:

"This is a … book concerned solely with describing the mathematics of option pricing and I found it a delight to read. It is very well written, quite comprehensive and non-rigorous so that it can be used on courses aimed at a variety of students. … The book includes a healthy number of exercises and there are fully worked solutions to most of these." (David Applebaum, The Mathematical Gazette, Vol. 90 (517), 2006)

"The book provides an introduction to the basic ideas of the mathematical theory of financial options valuation, or, more concretely, to the Black-Scholes theory of pricing contingent claims on equity. … The text is a brief, neat, carefully written introduction to the fundamentals of the mathematics and the modelling of the analysis of options pricing." (José Lúis Fernandez Perez, Zentralblatt MATH, Vol. 1042 (17), 2004)