IEEE Transactions on Automatic Control, Vol.49, No.3, 433-441, 2004
Remarks on the pricing of contingent claims under constraints
The study of the pricing of contingent claims under constraints leads, in the case of stocks obeying lognormal distributions, to an interesting analytical result. Namely, the price satisfies the Black Scholes equation with a different initial condition. We give a mostly analytical treatment of this result, using the probabilistic interpretation of the Cauchy problem, with nonsmooth initial conditions.