Ito calculus is a mathematical framework used to analyze stochastic processes, particularly in finance and economics. It extends traditional calculus to handle functions of random variables, allowing for the modeling of systems influenced by uncertainty. This approach is essential for understanding how random fluctuations affect various phenomena. Developed by Japanese mathematician Kiyoshi Ito in the 1940s, Ito calculus introduces concepts like Ito integrals and Ito's lemma. These tools enable the calculation of expected values and variances in stochastic models, making it crucial for pricing derivatives and managing risk in financial markets.