easy · Quantitative Finance stochastic
Under the Feynman-Kac formula, if a derivative price V(S, t) satisfies the Black-Scholes PDE, the solution can be expressed as V(S, t) = e^-r(T-t) E^Q [h(S_T) | S_t = S].
What does the term h(S_T) represent in terms of the PDE?
- The risk-neutral probability density function of the terminal spot price.
- The boundary condition representing the value of the option as S to 0.
- The terminal condition V(S, T) specified at the end of the time horizon.
- The Greeks, specifically the delta of the option at maturity.
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