Black-Scholes option pricing within Ito and Stratonovich conventions

Josep Perelló (), J. M. Porra, Miquel Montero () and J. Masoliver

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Abstract: Options financial instruments designed to protect investors from the stock market randomness. In 1973, Fisher Black, Myron Scholes and Robert Merton proposed a very popular option pricing method using stochastic differential equations within the Ito interpretation. Herein, we derive the Black-Scholes equation for the option price using the Stratonovich calculus along with a comprehensive review, aimed to physicists, of the classical option pricing method based on the Ito calculus. We show, as can be expected, that the Black-Scholes equation is independent of the interpretation chosen. We nonetheless point out the many subtleties underlying Black-Scholes option pricing method.

Date: 2000-01, Revised 2000-04
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Citations: View citations in EconPapers (1)

Published in Physica A 278 (2000) 1-2, 260-274

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http://arxiv.org/pdf/physics/0001040 Latest version (application/pdf)

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Journal Article: Black–Scholes option pricing within Itô and Stratonovich conventions (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:physics/0001040

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