Applications: Markov Models and Pricing

This lecture covers the application of Markov models in finance, focusing on pricing derivatives and risk-neutralization. It discusses the generator of the process, risk-neutralization under the Equivalent Martingale Measure (EMM), Markov pricing, and hedging strategies. The lecture also delves into bond pricing, the forward measure, option pricing, and the use of Vasicek and Black-Scholes-Merton (BSM) models. Additionally, it explores topics such as foreign exchange, FX forwards, carry trades, FX options, quanto options, and hedging strategies for various financial instruments.