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Let $\{P_t \mid t \geq 0\}$ be a compound Poisson process, where \begin{align*} P_t = \sum_{i=1}^{N_t} (V_i -1), \end{align*} and $N_t$ is a Poisson process with intensity $\lambda$ and jump times $\tau_i$, $i = 1, \ldots, \infty$. Let $Y_i=\ln V_i$ and $f(x)$ be the density function. Then \begin{align*} P_t - \lambda t E(V_1) &= P_t - \lambda t ...


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Let's start with the main idea, I hope you can finish the computations yourself. Whenever you want to derive a pricing equation, try the following approach: discounted value of portfolio/option/derivative must be a martingale for non-arbitrage reasons. Since you have a Markovian dynamics in variables $t$ and $S$, you assume that the price is some function ...



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