Markets: A Rigorous Course

M08 · Problem 10 ★★

Solutions of the Black–Scholes PDE

Take q=0q=0. (a) Show that V=SV=S, V=ertV=e^{rt} and V=S−Ke−r(T−t)V=S-Ke^{-r(T-t)} satisfy (8.18). Interpret each. (b) Find all solutions of the form V=SaV=S^a (no time dependence). (c) Using the Greeks of 8.9, verify directly that the call price (8.23) satisfies (8.18).

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