Black-Scholes option pricing within Ito and Stratonovich conventions

Options financial instruments designed to protect investors from the stock market randomness. In 1973, Fisher Black, Myron Scholes and Robert Merton proposed a very popular option pricing method using stochastic differential equations within the Ito interpretation. Herein, we derive the Black-Scholes equation for the option price using the Stratonovich calculus along with a comprehensive review, aimed to physicists, of the classical option pricing method based on the Ito calculus. We show, as can be expected, that the Black-Scholes equation is independent of the interpretation chosen. We nonetheless point out the many subtleties underlying Black-Scholes option pricing method.Comment: 14 page

Diffusion of particles moving with constant speed

The propagation of light in a scattering medium is described as the motion of a special kind of a Brownian particle on which the fluctuating forces act only perpendicular to its velocity. This enforces strictly and dynamically the constraint of constant speed of the photon in the medium. A Fokker-Planck equation is derived for the probability distribution in the phase space assuming the transverse fluctuating force to be a white noise. Analytic expressions for the moments of the displacement $$ along with an approximate expression for the marginal probability distribution function $P(x,t)$ are obtained. Exact numerical solutions for the phase space probability distribution for various geometries are presented. The results show that the velocity distribution randomizes in a time of about eight times the mean free time ($8t^*$) only after which the diffusion approximation becomes valid. This factor of eight is a well known experimental fact. A persistence exponent of $0.435 \pm 0.005$ is calculated for this process in two dimensions by studying the survival probability of the particle in a semi-infinite medium. The case of a stochastic amplifying medium is also discussed.Comment: 9 pages, 9 figures(Submitted to Phys. Rev. E

Mean first passage times of processes driven by white shot noise

The systems driven by white shot noise are analyzed based on mean first passage times. The shot noise has exponentially distributed jump heights. The the linkage between the results and the steady state probability density function of the process are presented

Bistability driven by white shot noise

We consider mean-first-passage times and transition rates in bistable systems driven by white shot noise. We obtain closed analytical expressions, asymptotic approximations, and numerical simulations in two cases of interest: (i) jumps sizes exponentially distributed and (ii) jumps of the same size

Persistent random walk model for transport trough thin slabs

We present a model for transport in multiply scattering media based on a three-dimensional generalization of the persistent random walk. The model assumes that photons move along directions that are parallel to the axes. Although this hypothesis is not realistic, it allows us to solve exactly the problem of multiple scattering propagation in a thin slab. Among other quantities, the transmission probability and the mean transmission time can be calculated exactly. Besides being completely solvable, the model could be used as a benchmark for approximation schemes to multiple light scattering