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Math Help - Black-Scholes model

  1. #1
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    Red face Black-Scholes model

    Hi,
    Could someone help, I dont even know where to start...
    The question is, prove the following formula (the one to the right)
    Black-Scholes model-bild-13-.jpgBlack-Scholes model-bild-12-.jpg

    Thanks!!
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  2. #2
    MHF Contributor
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    Re: Black-Scholes model

    Hey emme1.

    There are three main approaches to prove the Black Scholes formula. They include:

    1) The PDE Approach (you transform the problem to a heat equation PDE and solve)
    2) The Stochastic DE approach (You use Ito's result and solve)
    3) The Probability Approach (You find the random variable that corresponds to a Price at time t and then take the expectation to get the fair price)

    All approaches will give the same answer and each requires a different kind of thinking and reasoning.
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