Proof in Neftci Chapter 21

Bill · January 6th, 2006, 7:30 am

There is a proof technique in chapter 21 of Neftici's book "Introduction to the Mathematics of Financial Derivatives" for deriving a PDE directly from an expectation. He shows this for the case of:by deriving the PDE satisfied by the price of a zero coupon discount bond. Has anyone seen or used this before? The proof is a bit hand-wavy and appeals to some technical conditions under which one is allowed to commute the lim and E[] operators. Can someone explain what these conditions are?RegardsBill

Rufus · January 6th, 2006, 3:12 pm

you can use Feynman-Kac to get to a pde from the expectation you have. Check out Oksendal ch 8.

Bill · January 6th, 2006, 4:01 pm

Hi RufusThanks for that; I will check out Oksendal. BTW all the presentations of FK I've seen are for going from PDE -> expectation.