Sep 21, 2017 term paper 2

PROVE PROPOSITION 9.7 BY COMPARING THE STOCK HOLDINGS IN THE CONTINUOUSLY REBALANCED PORTFOLIO TO…

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Prove Proposition 9.7 by comparing the stock holdings in the continuously rebalanced portfolio to the replicating portfolio in Theorem 8.5 of the previous chapter.

Proposition 9.7

In a continuously rebalanced delta hedge, the value of the stock and money holdings will replicate the value of the derivative.

Theorem 8.5

Consider the market (8.2)-(8.3), and a contingent claim of the form  Define F as the solution to the boundary value problem



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