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Journals / Proceedings of International Mathematical Sciences / 2026 / Volume: 3 Issue: 1

Derivation of Black-Scholes Equation Using Itô's Lemma

Brandon Washburn(Beloit College)0000-0002-5815-3873
Mehmet Dik(Rockford University)0000-0003-0643-2771
Pages
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Publication Date
2021-06-15
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AI Summary & Key Takeaways

AI Insight
⚡ TL;DR(Too Long; Didn't Read)

This paper aims to take a simple look at the derivation of the Black-Scholes equation as well as the reasoning behind it.

📌 3 Key Takeaways

🎯
Objective & Hypothesis:The Black-Scholes Equation is arguably the most influential financial equation, as it is an effective example of how to eliminate risk from a financial portfolio by using a hedged position.
📊
Key Findings & Data:Hedged positions are used by many firms, mutual funds and finance companies to increase the value of financial assets over time.
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Conclusion & Impact:This paper aims to take a simple look at the derivation of the Black-Scholes equation as well as the reasoning behind it.
🔬Design:Research Article
📍Scope:Comprehensive Sample
⚙️Variables:Stochastic · Black-Scholes Equation · Itô Calculus

Abstract

The Black-Scholes Equation is arguably the most influential financial equation, as it is an effective example of how to eliminate risk from a financial portfolio by using a hedged position. Hedged positions are used by many firms, mutual funds and finance companies to increase the value of financial assets over time. The derivation of the Black-Scholes equation is often considered difficult to understand and overly complicated, when in reality most confusion arises from misunderstandings in notation or lack of intuition around the mathematical processes involved. This paper aims to take a simple look at the derivation of the Black-Scholes equation as well as the reasoning behind it.

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Cite This Article

Washburn, B., Dik, M. (2021). Derivation of Black-Scholes Equation Using Itô's Lemma. Proceedings of International Mathematical Sciences, Volume: 3 Issue: 1. https://doi.org/10.47086/pims.956201

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References (9)

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