Suppose the price process of an asset follows the diffusion process Show that the corresponding governing equation

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Suppose the price process of an asset follows the diffusion process

Show that the corresponding governing equation for the price of a derivative security V contingent on the above asset takes the form

av 1 t +50 (S, 1). av as av +rS -rV = 0, as

where r is the riskless interest rate. Again, the derivative price V does not depend on the instantaneous mean μ(S_t,t) of the diffusion process.

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Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

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Question Posted: Dec 02, 2023 04:04 AM

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Suppose the price process of an asset follows the diffusion process Show that the corresponding governing equation

Question:

dSt = μ(St, t) dt + o (St, t) d Z₁.

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The price of a derivative security V contingent on the underlying asset S can be determined using th...View the full answer

Mathematical Models Of Financial Derivative

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