Chapter 7
The Black-Scholes Model
7.1 Derivation of the Black-Scholes Equation
Rating
Mathematically Mature: may contain mathematics beyond calculus with
proofs.
Section Starter Question
What is the most important idea in the derivation of the binomial option
pricing model?
Key Concepts
7.1 Derivation of the Black-Scholes Equation
(a) tools from calculus,(b) the quadratic variation of Geometric Brownian Motion,(c) the no-arbitrage condition to evaluate growth of non-risky portfo-
lios,(d) and a simple but profound insight to eliminate the randomness or
risk.