The two best ways to derive the Black–Scholes PDE

Paul Wilmott

China Finance Review International, 2019, vol. 10, issue 2, 168-174

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: Hedging; Black–Scholes; Partial differential equation (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-12-2018-0153

DOI: 10.1108/CFRI-12-2018-0153

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