Stochastic calculus has been applied to the problems of pricing financial derivatives since 1973
when Black and Scholes published their famous paper ”The pricing of options and corporate
liabilities” in the journal of political economy. In this work, we introduce basic concepts of
probability theory which gives a better understanding in the study of stochastic processes, such
as Markov process, Martingale and Brownian motion. We then construct the Itˆo’s integral under
stochastic calculus and it was used to study stochastic differential equations. The lognormal
model was used to model asset prices showing its usefulness in financial mathematics. Finally,
we show how the famous Black-Scholes model for option pricing was obtained from the lognormal
Edu, F (2021). Stochastic Models for Asset Pricing. Afribary.com: Retrieved May 06, 2021, from https://afribary.com/works/stochastic-models-for-asset-pricing
Frontiers, Edu. "Stochastic Models for Asset Pricing" Afribary.com. Afribary.com, 13 Apr. 2021, https://afribary.com/works/stochastic-models-for-asset-pricing . Accessed 06 May. 2021.
Frontiers, Edu. "Stochastic Models for Asset Pricing". Afribary.com, Afribary.com, 13 Apr. 2021. Web. 06 May. 2021. < https://afribary.com/works/stochastic-models-for-asset-pricing >.
Frontiers, Edu. "Stochastic Models for Asset Pricing" Afribary.com (2021). Accessed May 06, 2021. https://afribary.com/works/stochastic-models-for-asset-pricing