Home / Questions / Consider the derivation of the Black-Scholes model o

Consider the derivation of the Black-Scholes model o

Question 1 Consider the derivation of the Black-Scholes model of option pricing. Let S=S(t) be the underlying stock price at time t and let f=f(S, t) be the option price at time t.

a) Write down the value P of the portfolio defined in the Black-Scholes model. [2 marks]

b) Use Itô’s lemma to find an expression for the change Δf in the discrete time Δt. [5 marks]

c) Use the expression you have found in point b) to find an expression for the discrete change in the value of the Black-Scholes portfolio. [5 marks]

d) Find the number of shares ‘Delta’ so that the random component is eliminated from the discrete change in the value of the Black-Scholes portfolio? [3 marks]

e) Given the choice you indicated for the Black-Scholes ‘Delta’, now derive the BlackScholes partial differential equation. [15 marks]

Aug 10 2020 Read more Less More

Answer (Solved)

question Get solution

Recent Questions

Chat Now

Welcome to Live Chat

Welcome to MyCourseHelp Services, World's leading Academic solutions provider with Millions of Happy Students.

Please fill in the form