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Lecture 21: Black-Scholes Formula, Risk Neutral Valuation
Description
MIT 18.642 Topics in Mathematics with Applications in Finance, Fall 2024
Instructor: Vasily Strela
View the complete course: https://ocw.mit.edu/courses/18-642-topics-in-mathematics-with-applications-in-finance-fall-2024
YouTube Playlist: https://www.youtube.com/playlist?list=PLUl4u3cNGP601Q2jo-J_3raNCMMs6Jves
This lecture explores the fundamental concept of risk-neutral pricing as a powerful framework for derivative valuation, illustrated through examples like forward contracts and options. It further explains the derivation of the Black-Scholes equation from stochastic calculus, highlighting how derivative prices depend primarily on volatility and interest rates, not on investors’ risk preferences, and concludes with practical insights into option replication and hedging strategies.
License: Creative Commons BY-NC-SA
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