Question: The formula for an infinitely lived call is given in equation (12.18). Suppose that S follows equation (20.20), with replaced by r, and that

The formula for an infinitely lived call is given in equation (12.18). Suppose that S follows equation (20.20), with Î± replaced by r, and that Eˆ—(dV ) = rV dt. Use ItË†o€™s Lemma to verify that the value of the call, V (S), satisfies this equation:

to?s?Vss + (r 8)SVs -rV = 0

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