Chapter 15. Valuation Framework

Compound interest is the greatest mathematical discovery of all time.

— Albert Einstein

This chapter provides the framework for the development of the DX library by introducing

the most fundamental concepts needed for such an undertaking. It briefly reviews the

Fundamental Theorem of Asset Pricing, which provides the theoretical background for the

simulation and valuation. It then proceeds by addressing the fundamental concepts of date

handling and risk-neutral discounting. We take only the simplest case of constant short

rates for the discounting, but more complex and realistic models can be added to the

library quite easily. This chapter also introduces the concept of a market environment

— i.e., a collection of constants, lists, and curves needed for the instantiation of almost

any other class to come in subsequent chapters.