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I want to know if anybody can suggest me a good textbook which explains in detail and in an understandable way how to create replicating portfolios of financial instruments like options "cash or nothing", "asset or nothing". Moreover I want to know if there's any good book which explains the change of measure between objective probability and risk neutral probability... Sorry for the newbie question, but I'm attending a course about this stuff and the professor provides lecture notes badly written that don't tell the whole story...

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As always I recommend reading Rennie and Baxter for an introduction to option pricing that's not too technical and gives intuition about how it all works.

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  • $\begingroup$ Thanks for the suggestion. I've browsed the book a bit and found a lot of information, not to mention countless worked examples. It would be extremely helpful if somebody could alzo recommend a book - or maybe even on line lecture notes or exercises that expain well how to replicate portfolios of cash or nothing or asset or nothing options... I've heard that for CoN there's a paper of Breeden-Litzenberger (1978) but maybe it's too advanced and I need to have a grasp of the things on a more basic level... $\endgroup$ – james42 Apr 27 '15 at 11:39

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