The fundamental asset pricing partial differential equation (PDE) is used to derive the Black-Scholes formula. Which of the following statements is not true about the fundamental PDE?
A) The PDE depends on the growth rate of the stock.
B) The PDE is independent of the the utility function of the investor buying the option.
C) The PDE is the same for both calls and puts, the only difference being in the boundary conditions.
D) The solution to the PDE is the Black-Scholes option pricing formula.

Question

Quizplus · Accepted Answer

The fundamental asset pricing PDE, used in deriving the Black-Scholes formula, is independent of the stock's growth rate. It instead relies on the risk-free rate, the stock's volatility, and other factors, but not directly on the stock's growth rate.

The Fundamental Asset Pricing Partial Differential Equation (PDE) Is Used