dorsal/arxiv
View SchemaBlack-Scholes option pricing within Ito and Stratonovich conventions
| Authors | J. Perello, J. M. Porra, M. Montero, J. Masoliver |
|---|---|
| Categories | |
| ArXiv ID | physics/0001040 |
| URL | https://arxiv.org/abs/physics/0001040 |
| DOI | 10.1016/S0378-4371(99)00612-3 |
| Journal | Physica A 278 (2000) 1-2, 260-274 |
Abstract
Options financial instruments designed to protect investors from the stock market randomness. In 1973, Fisher Black, Myron Scholes and Robert Merton proposed a very popular option pricing method using stochastic differential equations within the Ito interpretation. Herein, we derive the Black-Scholes equation for the option price using the Stratonovich calculus along with a comprehensive review, aimed to physicists, of the classical option pricing method based on the Ito calculus. We show, as can be expected, that the Black-Scholes equation is independent of the interpretation chosen. We nonetheless point out the many subtleties underlying Black-Scholes option pricing method.
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"abstract": "Options financial instruments designed to protect investors from the stock\nmarket randomness. In 1973, Fisher Black, Myron Scholes and Robert Merton\nproposed a very popular option pricing method using stochastic differential\nequations within the Ito interpretation. Herein, we derive the Black-Scholes\nequation for the option price using the Stratonovich calculus along with a\ncomprehensive review, aimed to physicists, of the classical option pricing\nmethod based on the Ito calculus. We show, as can be expected, that the\nBlack-Scholes equation is independent of the interpretation chosen. We\nnonetheless point out the many subtleties underlying Black-Scholes option\npricing method.",
"arxiv_id": "physics/0001040",
"authors": [
"J. Perello",
"J. M. Porra",
"M. Montero",
"J. Masoliver"
],
"categories": [
"physics.soc-ph",
"cond-mat.stat-mech",
"physics.data-an",
"q-fin.PR"
],
"doi": "10.1016/S0378-4371(99)00612-3",
"journal_ref": "Physica A 278 (2000) 1-2, 260-274",
"title": "Black-Scholes option pricing within Ito and Stratonovich conventions",
"url": "https://arxiv.org/abs/physics/0001040"
},
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