Consider the expression for d given in (3.5.17). Show that the variance of d is given by

Consider the expression for dΠ given in (3.5.17). Show that the variance of dΠ is given by 

Suppose we try to hedge the diffusion and jump risks as much as possible by minimizing var(dΠ). Show that this can be achieved by choosing Δ such that 

With this choice of Δ, find the corresponding governing equation for the option price function under the jump-diffusion asset price dynamics.

Transcribed Image Text:

var (dII) - (₁ - 35) ²³0 (4- =) = as + λEj[{A(J− 0² S² dt - 1)S – [V(JS, t) – V(S, t)]}²] dt. -