I'm self-studying for an actuarial exam on financial economics and encountered the below practice exam problem.
An exam problem should typically take 5-6 minutes to complete, so I'm wondering if there is a "quick" way to confirm that answer choice (D) does not satisfy the Black-Scholes PDE.
Assuming for the moment that $C(S, t)$ does not pay dividends (which in my opinion cannot be assumed just from the information provided), the PDE implies that $r = 0.04$, $\delta = 0.02$ and $\sigma = 0.3$.
So I would think that any asset that has these parameters will satisfy the PDE. Let's check:
(A) is the price of a risk-free bond with maturity value 1.
(B) is the price of a cash-or-nothing call that pays 1 when the stock price is above 100.
(C) is the price of a cash-or-nothing put that pays 1 when the stock is below 100.
(E) is the price of an asset-or-nothing put that pays the stock when the stock price is below 100.
By elimination, that leaves (D) as the claim that does not satisfy the PDE.
But what if I wanted to show that (D) cannot satisfy the PDE? I can only think to find $C_s$, $C_{ss}$ and $C_t$. However, this would be messy as $C(S, t)$ would require differentiating $N(d_1)$. Is there an quicker or better way of convincing myself that (D) cannot satisfy the equation?