3.4 Modelling price processes - diffusive parabolic PDEs and expectations

This paper covers:

·        Categories of second order PDE

·        Parabolic diffusion equations

·        A binomial formulation of Brownian motion

·        The general diffusion equation

·        Initial conditions

·        Boundary conditions – an absorbing boundary

·        Boundary conditions – a reflecting (elastic) boundary

·        A trinomial formulation of Brownian motion

·        The forward Kolmogorov equation

·        The backward Kolmogorov equation

·        The Feynman-Kac stochastic representation theorem

·        Applications in finance

This paper has 12 pages