The conversation between human and AI assistant.
How are differential equations used in Economics and Financial markets?
Can you explain how the Black-Scholes model works?
The Black-Scholes model is based on the assumption that the price of a stock follows a lognormal distribution. It uses differential equations to calculate the expected change in the value of an option based on changes in the underlying asset's price, time, and volatility. This information is then used to calculate the fair price of an option contract.