Week 4: Physics Heat Equation

Mar 17, 2019

Hello all blog readers,

       This week, I started discussing with my internal advisor on how to reverse Black-Scholes. First, we discussed the physics heat equation and started solving the differential equation. In order to solve this equation, we had to make some mathematical assumptions and use the Fourier series to solve the differential. Since I was coming from vacation in India, I wasn’t as sharp as I normally was but it felt good to have my math skills refreshed. One important thing I learned is that the makers of Black-Scholes, Black and Scholes, could have made a better equation but it would have been harder to solve the math. Instead, they linked Black-Scholes (I will be deriving this next week) to the physics heat equation which has a known solution.

                                                                                                                                                                                                  -Partha V

 

                                                                               

2 Replies to “Week 4: Physics Heat Equation”

  1. Shreyas M. says:

    Wow! I am really interested to learn more about Black-Scholes.

  2. Rohit P. says:

    Fourier series’ seem to be super complex

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