medium · Quantitative Finance stochastic
What is the primary reason the Feynman-Kac formula is considered a 'bridge' in quantitative finance?
- It allows American-style options to be converted directly into equivalent European options.
- It proves that pricing can be done either by solving a PDE or by running a Monte Carlo simulation.
- It links the prices of stocks and the prices of bonds together through one single unifying equation.
- It connects the market's implied volatility smile directly to the realized volatility of the underlying asset.
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