13 questions linked to/from Black Scholes differential
483 views

### Derivation of BS PDE problem using Delta hedging

I've always been confused with Delta hedging. It is well-known that for a (smooth enough) function of $(S,t)$ we have, due to Ito's lemma, that: \begin{eqnarray*} dC = \left(\frac{\partial C}{\partial ...
971 views

### Dynamic Delta Hedging And a Self Financing Portfolio

Let's assume the usual Black Scholes assumptions hold. My question is related to an answer on this question. There, the weights ($\Delta_t^1$,$\Delta_t^2$) are derived which form a locally risk free ...
292 views

### Replicating a portfolio with a certain payoff function

Assume there are two stocks $S_1$ with price $p_1(t)$ and $S_2$ with price $p_2(t)$ where $t$ indicates time. Assume, there is a hypothetical derivative $D$, which is such that, price of $D$ at a time ...
234 views

203 views

### What is a Short Option Hedging Portfolio?

In his book 'Stochastic Calculus for Finance II' Shreve uses the term: 'Short Option Hedging Portfolio' on page.156 (4.5.3). Can someone please explain this term with some kind of an example? It is ...
157 views

### Notion of risk-less portfolio in derivation of Black-Scholes

EDIT: As pointed out by Gordon in the comments, the portfolio I considered in my original post is neither self-financing nor (locally) risk-free. Though the central question is still open. Suppose ...
97 views

\begin{align} d\pi &= \theta dV + dS \\[3pt] & = (\theta \partial V/\partial t + \theta \mu S \partial V/\partial S + \theta S^2 \sigma^2 \partial^2 V/2\partial S^2 +\mu S ) dt + (\theta \... 1answer 84 views ### Assumption in black scholes solution Under the usual notations, In most textbooks on Quantative Finance, for deriving the Black-Scholes solution I find that authors, while setting up the riskless portfolio, assume that,\text{d} (\...
Imagine buying a call option and shorting the delta. After some time $dt$, the stock price changes, and so does the delta and the call option value. We re-adjust our hedge using this new delta. ...
Question: The following is my derivation of the Black-Scholes equation. Is it correct or am I missing some details (eg assumption)? Let $V$ be value of an option. Suppose value $\Pi$ of a portfolio ...