medium · Quantitative Finance

In the context of the Black-Scholes PDE, what does the term (1)/(2)σ^2 S^2 (partial^2 V)/(partial S^2) physically represent?

1. The expected return on the option due to the risk-free rate.
2. The cost of hedging the option's Delta.
3. The dollar-gamma contribution to the change in option value.
4. The sensitivity of the option to changes in interest rates (Rho).

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