The theory underlying financial derivatives which involves ``stochastic calculus'' and assumes an uncorrelated Log
Normal Distribution of continuously varying prices. A simplified ``binomial'' version of the theory was subsequently
developed by Sharpe *et al. *(1995) and Cox *et al. *(1979). It reproduces many results of the full-blown theory, and allows
approximation of options for which analytic solutions are not known (Price 1996).

**References**

Black, F. and Scholes, M. S. ``The Pricing of Options and Corporate Liabilities.''
*J. Political Econ.* **81**, 637-659, 1973.

Cox, J. C.; Ross, A.; and Rubenstein, M. ``Option Pricing: A Simplified Approach.'' *J. Financial Economics*
**7**, 229-263, 1979.

Price, J. F. ``Optional Mathematics is Not Optional.'' *Not. Amer. Math. Soc.* **43**, 964-971, 1996.

Sharpe, W. F.; Alexander, G. J.; and Bailey, J. V. *Investments, 5th ed.* Englewood Cliffs, NJ: Prentice-Hall, 1995.

© 1996-9

1999-05-26