SOLUTION OF THE BLACK-SCHOLES EQUATION VIA HEAT EQUATION FOR PRICING EUROPEAN OPTION

Abstract

The objective of the study is to obtain the Black-Scholes solution by transforming the Black-Scholes equation using heat equation and the usage of the solution to obtain the option price. The Black-Scholes equation will be transformed into the heat equation, and then use the heat fundamental equation to find the Black-Scholes solution. The Black-Scholes solution that were obtained will be used to find the theoretical price of the Black-Scholes European call and put option. This thesis uses the Research and Development method, that is a research approach that calls for the use of numbers throughout the research process, from data collection to data interpretation and result presentation.