For a derivative V(X T ) on an underlying X T as seen at time T, its
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For a derivative V(XT) on an underlying XT as seen at time T, its value is given by V(Xt) = e –r (T– t) E[V(XT)] = e –r (T– t) ∫∞–∞ V(x)p(x)dx, where p(•) is the probability density function. By differentiating V(Xt) with respect to t, applying Ito’s Lemma on V (XT) and changing the order of integration, derive the Fokker-Planck equation.
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