I would second Neftci as probably the least painful way to go about this if you really have to, but I personally prefer "Financial Calculus" by Baxter and Rennie. It's less thorough than Neftci but it introduces all the concepts in a much more intuitive way (by dealing with the discrete versions of all the important theorems first) and in my experience people without the relevant background (like doctors and lawyers on MBA courses) find it easier.
best dd -----Original Message----- From: PEN-L list [mailto:[EMAIL PROTECTED] Behalf Of Julio Huato Sent: 28 November 2006 04:30 To: [email protected] Subject: Re: Formula for disaster Michael Perelman wrote: > For anybody interested in the theory of mathematical finance theory, I would > suggest: > MacKenzie, Donald A. 2006. An Engine, Not a Camera (Cambridge: MIT Press). Not > only does he go through the mechanics, but he interviews the central figures in its > development. I truly recommend Salih Neftci's _Introduction to the Mathematics of Financial Derivatives_. He gives an informal, yet transparent, intuitive derivation of the arbitrage theorem (the "fundamental theory of finance") and Ito's lemma. These are two workhorses of finance theory. The former helps to calculate the risk-neutral synthetic probabilities that underlie exact option pricing and the latter is the notion of stochastic "integration," which you need to solve stochastic differential equations. If you don't have a strong background on measure theory (the superset of probability theory) and stochastic calculus, he's da man. And that's the case with most people approaching finance theory from the social science side -- as opposed to the physics side. It is not rocket science... hmm, well, it kind of is -- but it's too powerful to be left only to the physicists and mathematicians.
