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3. A key step in deriving the Black-Scholes Equation was to set the value of Amarket II equal to what would be gained at a
3. A key step in deriving the Black-Scholes Equation was to set the value of Amarket II equal to what would be gained at a bank. This comparison captures the value of the option relative to interest rates on the market. (a) Let V = CE. Instead of setting Equation 5.6 equal to bank rates, compare it to what would be obtained with II = PE(S, t) + BS. Find the resulting equation. (b) Find the Black-Scholes Equation for II = CE(S, t) + PE(S, t) 8S with a comparison to the interest rates. Compare answers and explain differences. 3. A key step in deriving the Black-Scholes Equation was to set the value of Amarket II equal to what would be gained at a bank. This comparison captures the value of the option relative to interest rates on the market. (a) Let V = CE. Instead of setting Equation 5.6 equal to bank rates, compare it to what would be obtained with II = PE(S, t) + BS. Find the resulting equation. (b) Find the Black-Scholes Equation for II = CE(S, t) + PE(S, t) 8S with a comparison to the interest rates. Compare answers and explain differences
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