The two best ways to derive the Black–Scholes PDE
China Finance Review International
ISSN: 2044-1398
Article publication date: 16 December 2019
Issue publication date: 23 March 2020
Abstract
Purpose
The purpose of this paper is to explain the Black–Scholes model with minimal technical requirements and to illustrate its impact from a business perspective.
Design/methodology/approach
The paper employs simple accounting concepts and an argument part based on business need.
Findings
The Black–Scholes partial differential equation can be derived in many ways, some easy to understand, some hard, some useful and others not. The two methods in this paper are extremely insightful.
Originality/value
The paper takes a big-picture view of derivatives valuation. As such, it is a simple accompaniment to more complex methods and aims to keep modelling grounded in reality.
Keywords
Citation
Wilmott, P. (2020), "The two best ways to derive the Black–Scholes PDE", China Finance Review International, Vol. 10 No. 2, pp. 168-174. https://doi.org/10.1108/CFRI-12-2018-0153
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited