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Key assumptions of the black-scholes model

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Reference no: EM132671423

This question is designed to make sure you know how to derive the Black-Scholes partial differential equation (pde).

a) Write down the key assumptions of the Black-Scholes model.

b) Why is Ito's lemma needed?

c) Derive the Black-Scholes pde,

d) What is the role of hedging? Why is this hedge portfolio also called a replicating portfolio? e) Why does the Black-Scholes pde not have a stochastic component?

Reference no: EM132671423

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