Abstract
The evolution of uncertainty over time can be conceptualized and modelled as a mathematical expression, known as a stochastic process, which describes the evolution of a random variable over time. Models of asset price behaviour for pricing derivatives are formulated in a continuous time framework by assuming a stochastic differential equation (SDE) describing the stochastic process followed by the asset price. The most well-known assumption made about asset price behaviour, which was made by Black and Scholes (1973) is geometric Brownian motion (GBM).
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References
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© 2002 Jamie Rogers
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Rogers, J. (2002). Option Pricing Methods. In: Strategy, Value and Risk — The Real Options Approach. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230513051_11
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DOI: https://doi.org/10.1057/9780230513051_11
Publisher Name: Palgrave Macmillan, London
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