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- Partial Differential Equation Approach /
- Partial Differential Equation Approach
Partial Differential Equation Approach
Pricing a derivative usually means computing the expectation of the discounted option’s payoff.
It is , where
is a certain payoff function and the stock price follows a stochastic process.
Assuming such a process and using a no-arbitrage argument, it is often possible to find a self-financing strategy that replicates the particular option. This will imply a PDE which the option’s price must satisfy. In this case, pricing on option amounts to solving the PDE.