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 E (dV ) rV dt Use Itos Lemma to verify that the value of the call, V (S), satisfies this equation 122S2VSS (r )SVS rV 0 ...

If V S satisfies the given equation then Since where a is constant showing y S a satis ...

The formula for an infinitely lived call is given in equation (12.18). Suppose that S follows equation

Question:

The formula for an infinitely lived call is given in equation (12.18). Suppose that S follows equation (20.20), with α replaced by r, and that E* (dV ) = rV dt. Use Itˆo’s Lemma to verify that the value of the call, V (S), satisfies this equation: 12σ2S2VSS + (r − δ)SVS − rV = 0