medium · Quantitative Finance

The BSM PDE derivation assumes the 'Law of One Price'. How does this principle apply to the hedged portfolio Π?

1. It requires that the call price plus the put price on the same strike always equal exactly the stock price S.
2. Since the portfolio Π is riskless, its price must be equal to the price of a risk-free bond with the same cash flow.
3. It implies that the implied volatility of all options traded on that same underlying stock must be exactly equal.
4. It states that the current stock price S must always equal its expected future value discounted at the real-world drift μ.

Sign up free to see the explanation and track your rank →