medium · Quantitative Finance
A quant is solving the PDE V_t + (1)/(2) σ^2 S^2 V_SS = 0.
Using Feynman-Kac, what does the solution V(S, t) represent?
- The undiscounted expected terminal payoff E^Q [h(S_T) | S_t = S] with zero drift.
- The price of a European call option in a standard Black-Scholes world.
- The probability that the stock price stays constant until maturity.
- The delta of the option when the risk-free rate is zero.
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