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20.10 The formula for an infinitely lived call is given in equation (12.18). Suppose that...

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Finance

20.10 The formula for an infinitely lived call is given in equation (12.18). Suppose that S
follows equation (20.20), with replaced by r, and that E*(dV)=rVdt. Use It's
Lemma to verify that the value of the call, V(S), satisfies this equation:
122S2VSS+(r-)SVS-rV=0 We will assume that the stock price, S(t), follows the It process given by
dS(t)={hat()[S(t),t]-hat()[S(t),t]}dt+hat()[S(t),t]dZ(t)
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