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Single-Period Financial Markets

In: Market-Consistent Prices

Author

Listed:
  • Pablo Koch-Medina

    (University of Zurich, Department of Banking and Finance)

  • Cosimo Munari

    (University of Zurich, Department of Banking and Finance)

Abstract

With this chapter we begin our study of financial markets. We consider a single-period economy where future uncertainty is modelled by a finite number of possible outcomes. At the initial date, agents can buy or sell a finite number of basic securities for a fixed price. Each of these securities entitles them to a terminal payoff, which depends on the future prevailing state of the economy. Through their trading activity agents set up portfolios that generate a payoff. If a payoff can be generated in this way it is said to be replicable. The market is said to be complete if every conceivable payoff is replicable. In some sense, this chapter is mainly meant to establish terminology and can be viewed as a dictionary between the language of mathematical finance and that of linear algebra.

Suggested Citation

  • Pablo Koch-Medina & Cosimo Munari, 2020. "Single-Period Financial Markets," Springer Books, in: Market-Consistent Prices, chapter 5, pages 103-123, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-39724-1_5
    DOI: 10.1007/978-3-030-39724-1_5
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