This book attempts to explain how any derivative pricing tool worthy of that name should work in the market. It attempts to understand what the market is, through the way in which the pricing tool works in the market. Recall that the pricing technology is both at one with the immemorial and immanent matter of the market and transcendent relative to the market — it is an a priori and apodictic stance — because of the element of design that is inherent in the technology. Recall that this point of view of the technology is what grants us access to the definition of the market. How a derivative pricing tool should work in the market is, first, by using probability theory and dynamic replication and, second, by recognizing that the matter that it is dealing with, the market of contingent claims, is precisely lodged outside any framing by probability theory or any fixed framework of states of the world. The regime-switching model will be the perfect illustration of this paradox when used as a derivative pricing technology and, accordingly, it will be our model for any derivative pricing technology.
KeywordsOption Price Stochastic Volatility Implied Volatility Data Generate Process Contingent Claim
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