Derivative Pricing in Discrete Time introduces the basic ideas of financial derivatives with a minimum of prerequisites. The presentation is mathematical but not overly technical. An undergraduate who has come to accept that life requires more than two variables (and an occasional proof) should feel comfortable here. Indeed, as an undergraduate-level mathematical treatment of the subject, this is the best textbook I have seen. The book is refreshingly straightforward and keeps its eye on essential issues such as replicating portfolios, no-arbitrage conditions, risk-neutral probabilities and the importance of complete markets for the theory. There is none of the filler that appears in many undergraduate books on financial derivatives, such as chapters on straddles and strangles and spreads.
The book seems ideal for self-study, and in the course of a semester a motivated student should be able to attempt all of the problems in the book, and solve most of them. The main theoretical ideas are established in the simplest possible contexts, before introducing the usual binomial pricing model and American options. There is a brief final chapter that discusses things passed over before, such as interest rate models and transaction costs. I would recommend the book to students preparing for financial careers, such as actuaries. Practical pricing models should make more sense with the theoretical grounding provided by this book.
John Curran is Associate Professor of Mathematics and the coordinator of the Actuarial Science and Economics Program at Eastern Michigan University.