The Stock Option Pricing problem and the Conduction Heat Transfer Problem'

1
The Stock Option Pricing problem and the
Conduction Heat Transfer Problem.

• Main Features
• Need to become familiar with the associated stock
  option jargon.
• Compare governing equations, analytical
  solutions, and constraints.
• What heat conduction problem is satisfied by the
  boundary conditions of an option pricing problem?

2
Explanation of terms (1)

• Option
• Exercise price
• Asset price
• Expiry
• Call
• Put
• Volatility, risk-free interest rate

3
Explanation of Terms (2)
4
Governing Equations and Constraints
Black-Scholes Eq.
1D Heat Conduction
Analytical Solution
Solutions for Call Put
5
Heat Conduction problem satisfied by
option-pricing constraints