Lecture 14

In Lecture 14, we introduced the Black–Scholes–Merton model, including its marketplace assumptions, the money market account, and the stock-price model. For simplicity, we assumed zero dividends (students may also make this assumption). We discussed self-financing replicating portfolios and began deriving the BSM partial differential equation using Itô’s formula (the derivation will be completed on Thursday).

Material used:

• Petters–Dong, Sec. 8.1, The BSM Model, pp. 384–391.
• Formula sheet for Lecture 14