In this chapter, we developed the following approaches to solving the option pricing problem: (a) The PDE

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In this chapter, we developed the following approaches to solving the option pricing problem:

(a) The PDE approach: In this method, we found that the call option value was the solution to the following differential equation:

(b) The risk-neutral approach: In this method, we solved for the option price by taking the following expectation (under the risk-neutral measure):

The answer to both these methods was found to be the same. Is this always true?

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Derivatives Principles And Practice

ISBN: 9780078034732

2nd Edition

Authors: Rangarajan Sundaram

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Question Posted: Jan 10, 2024 01:00 AM

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In this chapter, we developed the following approaches to solving the option pricing problem: (a) The PDE

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Yes the two methods are equivalent The eq...View the full answer

Derivatives Principles And Practice

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