There has been a revolution in financial economics, particularly in the theory of trading of derivative securities, in the past few decades. This book on mathematical finance deals with the study of pricing models of financial derivatives and some other highly relevant issues: choice under uncertainty, security analysis, capital structure and investment theory. The fundamental objective of the book is that in order to get a correct idea of the issues, first it is necessary to understand their economics (that is, potential cash flows) and then to do the mathematical analysis.

The book is divided into four parts. Part I is composed of Chapters 1–3. The first chapter provides a preliminary discussion on (i) financial institutions, (ii) markets and instruments, (iii) derivatives products, and (iv) portfolio management. Chapter 2 contains a relatively simple treatment of time value of money and intertemporal decision-making. Since financial decisions are intertemporal, they are generally characterized by uncertainty. We, therefore, present in Chapter 3 the relevant basic theoretical structure, which describes how individual investors behave in an uncertain situation. Concepts, such as attitudes towards risk, certainty equivalent and cost of risk, are also analyzed. Prospect theory, which incorporates psychology into the analysis of choice under uncertainty, is briefly discussed in the chapter.