Stochastic Financial Models

Why should financial models be stochastic? Randomness is an inescapable feature of financial markets; although some agents may be better at predicting the future behaviour of markets, even the most successful make losses from time to time.Our modelling therefore must involve probabilistic elements.The resulting discrete calculus may be used to construct quite general financial models. As an illustration, the technique was applied to the well known Black- Scholes model. It turned out that the discrete Black-Scholes equation is equivalent to the Cox-Ross-Rubinstein equation, as it should be. The ideas contained in discrete stochastic calculus open the door to a host of exciting research possibilities.