Deriving Black Scholes

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In this video, we derive the famous Black-Scholes Equation, the basis of all option pricing. I tried not to skip any steps, and tried to explain everything I was doing, so the derivation ought to be easy to follow. Let me know if I failed!

For this video, we need to know Ito's Lemma, and we need to work with Geometric Brownian motion, so it is highly advised that you go through those videos first!

Ito's Lemma:

Geometric Brownian Motion:

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  1. John the Quant
  2. black
  3. scholes
  4. derive
  5. derivation
  6. formula
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Комментарии
Автор

The explanation is great and straightforward and clear! Thanks a lot!

Man, your channel is so much underrated, I wish it a big growth in future!

MrTsessik
Автор

The explanation was really great, thank you for your time.

adambellevue
Автор

In addition to assumptions you’ve already mentioned, I would add the assumption of constant volatility in the market.

Maybe you can make an overview of separate models that adjust these assumptions? Like a BSM modification for stocks with dividends, or stochastic volatility models (Heston, Rough volatility, etc.) ?

MrTsessik