Teaching Stochastic Finance in a Multimedia Environment

Teaching Stochastic Finance on a basic level, e.g. to undergraduates or even in school is a task which is hard to fulfil with common continuous theory. It takes a lot of mathematical prerequisites, sometimes it is not even possible to introduce them since the level of education among students is too low. This is one of the main reasons for the use of discrete asset models to describe financial markets and their behaviour. With discrete theory it is possible to show the fundamental ideas of asset-pricing without spending much time on mathematical prerequisites. Besides this, the discrete asset-pricing theory is very suitable for visualization, especially computer-based multimedial visualization, an important fact in teaching a new subject to students. For illustration we use the CRR-model of a discrete financial market by Cox, Ross and Rubinstein (1979) and the examples of Eberlein (1998). The CRR-model describes a financial market as a number of assets mathematically represented by binomial trees where the steps indicate the discrete times of trading and the branches indicate the discrete states of the asset at each time. In this model there are several interesting facts to visualize. In part we will discuss here the behaviour of the equivalent martingale measure in a one-period model and the no-arbitrage option price in a multi-period model. The software we use for illustration is MS Excel, but other spreadsheets could also be used.