University of Agriculture Faisalabad

Differential Equation

By
Muhammad Ahsan Maqsood
2017-ag-1814

Technical Report for

Master of Sciences in Mathematics
April, 2019

University of Agriculture Faisalabad

 Differential Equation

By
Muhammad Ahsan Maqsood
2017-ag-1814

Technical Report is submitted to

faculty of sciences
in partial fullfilment of the requirements for the degree of
MSc Mathematics

April, 2019

University of Agriculture Faisalabad

1
 University of Agriculture Faisalabad

Differential Equation

By
Muhammad Ahsan Maqsood
2017-ag-1814
Technical Report is submitted to faculty of sciences in partial fullfilment of the requirements for the degree
of
MASTER OF SCIENCES IN MATHEMATICS
Dissertation Committee

Sir Khurram Shahzad

Member

Member

Coordinator,
MSc Mathematics (WP)
UAF Community College
Faisalabad
 Declaration
This is to certify that this technical report has not been submitted for obtaining similar degree from any
other institute.

1
 Dedicated
To
My Father
Maqsood Ahmad

2
 Abstract

In mathematics, an abstract differential equation is a differential equation in which the unknown function
and its derivatives take values in some generic abstract space (a Hilbert space, a Banach space, etc.).
Equations of this kind arise e.g. in the study of partial differential equations: if to one of the variables
is given a privilegiate position (e.g. time, in heat or wave equations) and all the others are put together,
an ordinary ”differential” equation with respect to the variable which was put in evidence is obtained.
Adding boundary conditions can often be translated in terms of considering solutions in some convenient
function spaces.
Contents

1 Differential Equation 2
1.1 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.4 Ordinary Differential Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.5 Partial Differential Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.6 Non-Linear Differential Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.7 Equation Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.8 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2 Partial Differential Equations 9

2.1 NOTATION OF PDEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 EXAMPLES OF PDEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 CLASSIFICATION OF PDEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3.1 1st ORDER PARTIAL DIFFERENTIAL EQUATION . . . . . . . . . . . . . . . . 10
2.3.2 2nd ORDER PARTIAL DIFFERENTIAL EQUATION . . . . . . . . . . . . . . . 11

3 WAVE EQUATION 12
3.1 INTRODUCTION TO WAVE EQUATION . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 1-D WAVE EQUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2.1 INITIAL CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2.2 BOUNDARY CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2.3 D’ALEMBERT’S SOLUTION OF 1-D WAVE EQUATION . . . . . . . . . . . . . 13
3.2.4 SEPARATION OF VARIABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2.5 EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 2-D WAVE EQUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.3.1 The Heat Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3.2 The Wave Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3.3 Separation of Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3.4 Solving the Heat Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3.5 Heat Equation with Non-Zero Temperature Boundaries . . . . . . . . . . . . . . . 20
3.3.6 Laplace’s Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.3.7 Vibrating String . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.4 Existence of Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.5 Connection to Difference Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6.1 Physics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.6.2 Biology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.6.3 Chemistry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.6.4 Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Black-Scholes Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.8 The Black-Scholes World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.9 Black-Scholes Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.10 Black-Scholes Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.10.1 Alternative Formulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.11 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

1
Chapter 1

Differential Equation

A differential equation is a mathematical equation that relates some func-

tion with its derivatives. In applications, the functions usually represent
physical quantities, the derivatives represent their rates of change, and the
equation defines a relationship between the two. Because such relations are
extremely common, differential equations play a prominent role in many
disciplines including engineering, physics, economics, and biology.
In pure mathematics, differential equations are studied from several dif-
ferent perspectives, mostly concerned with their solutions—the set of func-
tions that satisfy the equation. Only the simplest differential equations are
solvable by explicit formulas; however, some properties of solutions of a
given differential equation may be determined without finding their exact
form.
If a self-contained formula for the solution is not available, the solution
may be numerically approximated using computers. The theory of dynam-
ical systems puts emphasis on qualitative analysis of systems described by
differential equations, while many numerical methods have been developed
to determine solutions with a given degree of accuracy.

If a closed-form expression for the solution is not available, the solution

may be numerically approximated using computers. The theory of dynam-
ical systems puts emphasis on qualitative analysis of systems described by
differential equations, while many numerical methods have been developed
to determine solutions with a given degree of accuracy.

2
1.1 History

Differential equations first came into existence with the invention of cal-
culus by Newton and Leibniz. In Chapter 2 of his 1671 work ”Methodus
fluxionum et Serierum Infinitarum”, Isaac Newton listed three kinds of
differential equations:

dy
= f (x)
dx
dy
= f (x, y)
dx
∂y ∂y
x1 + x2 =y
∂x1 ∂x2
He solves these examples and others using infinite series and discusses the
non-uniqueness of solutions.
Jacob Bernoulli proposed the Bernoulli differential equation in 1695.
This is an ordinary differential equation of theform

y 0 + P (x)y = Q(x)y n

for which the following year Leibniz obtained solutions by simplifying it.
Historically, the problem of a vibrating string such as that of a musi-
cal instrument was studied by Jean le Rond d’Alembert, Leonhard Euler,
Daniel Bernoulli, and Joseph-Louis Lagrange. In 1746, d’Alembert dis-
covered the one-dimensional wave equation, and within ten years Euler
discovered the three-dimensional wave equation.

The Euler–Lagrange equation was developed in the 1750s by Euler and

Lagrange in connection with their studies of the tautochrone problem.
This is the problem of determining a curve on which a weighted particle
will fall to a fixed point in a fixed amount of time, independent of the
starting point.
Lagrange solved this problem in 1755 and sent the solution to Euler.
Both further developed Lagrange’s method and applied it to mechanics,
which led to the formulation of Lagrangian mechanics.

3
 In 1822, Fourier published his work on heat flow in Théorie analytique
de la chaleur (The Analytic Theory of Heat), in which he based his rea-
soning on Newton’s law of cooling, namely, that the flow of heat between
two adjacent molecules is proportional to the extremely small difference
of their temperatures. Contained in this book was Fourier’s proposal of
his heat equation for conductive diffusion of heat. This partial differential
equation is now taught to every student of mathematical physics.

1.2 Example

For example, in classical mechanics, the motion of a body is described by

its position and velocity as the time value varies. Newton’s laws allow these
variables to be expressed dynamically (given the position, velocity, accel-
eration and various forces acting on the body) as a differential equation
for the unknown position of the body as a function of time.
In some cases, this differential equation (called an equation of motion)
may be solved explicitly.

An example of modelling a real world problem using differential equa-

tions is the determination of the velocity of a ball falling through the air,
considering only gravity and air resistance. The ball’s acceleration towards
the ground is the acceleration due to gravity minus the acceleration due
to air resistance. Gravity is considered constant, and air resistance may
be modeled as proportional to the ball’s velocity.

This means that the ball’s acceleration, which is a derivative of its velocity,
depends on the velocity (and the velocity depends on time). Finding the
velocity as a function of time involves solving a differential equation and
verifying its validity.

1.3 Types

Differential equations can be divided into several types. Apart from de-
scribing the properties of the equation itself, these classes of differential
equations can help inform the choice of approach to a solution. Com-
monly used distinctions include whether the equation is: Ordinary/Partial,

4
Linear/Non-linear, and Homogeneous/Inhomogeneous. This list is far
from exhaustive; there are many other properties and subclasses of dif-
ferential equations which can be very useful in specific contexts.

1.4 Ordinary Differential Equation

Main articles: Ordinary differential equation and Linear differential equa-

tion An ordinary differential equation (ODE) is an equation containing an
unknown function of one real or complex variable x, its derivatives, and
some given functions of x. The unknown function is generally represented
by a variable (often denoted y), which, therefore, depends on x. Thus x
is often called the independent variable of the equation. The term ”ordi-
nary” is used in contrast with the term partial differential equation, which
may be with respect to more than one independent variable.

Linear differential equations are the differential equations that are linear
in the unknown function and its derivatives. Their theory is well developed,
and, in many cases, one may express their solutions in terms of integrals.
Most ODEs that are encountered in physics are linear, and, therefore,
most special functions may be defined as solutions of linear differential
equations (see Holonomic function).

As, in general, the solutions of a differential equation cannot be ex-

pressed by a closed-form expression, numerical methods are commonly
used for solving differential equations on a computer.

1.5 Partial Differential Equation

A partial differential equation (PDE) is a differential equation that con-

tains unknown multivariable functions and their partial derivatives. (This
is in contrast to ordinary differential equations, which deal with functions
of a single variable and their derivatives.) PDEs are used to formulate
problems involving functions of several variables, and are either solved in
closed form, or used to create a relevant computer model.

5
 PDEs can be used to describe a wide variety of phenomena in nature
such as sound, heat, electrostatics, electrodynamics, fluid flow, elasticity,
or quantum mechanics. These seemingly distinct physical phenomena can
be formalised similarly in terms of PDEs. Just as ordinary differential
equations often model one-dimensional dynamical systems, partial differ-
ential equations often model multidimensional systems. PDEs find their
generalisation in stochastic partial differential equations.

1.6 Non-Linear Differential Equation

Non-linear differential equations are formed by the products of the un-

known function and its derivatives are allowed and its degree is ¿ 1. There
are very few methods of solving nonlinear differential equations exactly;
those that are known typically depend on the equation having particular
symmetries.

Nonlinear differential equations can exhibit very complicated behavior over

extended time intervals, characteristic of chaos. Even the fundamental
questions of existence, uniqueness, and extendability of solutions for non-
linear differential equations, and well-posedness of initial and boundary
value problems for nonlinear PDEs are hard problems and their resolution
in special cases is considered to be a significant advance in the mathemat-
ical theory (cf. Navier–Stokes existence and smoothness). However, if the
differential equation is a correctly formulated representation of a meaning-
ful physical process, then one expects it to have a solution.

Linear differential equations frequently appear as approximations to

nonlinear equations. These approximations are only valid under restricted
conditions. For example, the harmonic oscillator equation is an approxima-
tion to the nonlinear pendulum equation that is valid for small amplitude
oscillations.

1.7 Equation Order

Differential equations are described by their order, determined by the term

with the highest derivatives. An equation containing only first derivatives

6
is a first-order differential equation, an equation containing the second
derivative is a second-order differential equation, and so on. Differential
equations that describe natural phenomena almost always have only first
and second order derivatives in them, but there are some exceptions, such
as the thin film equation, which is a fourth order partial differential equa-
tion.

1.8 Examples

Inhomogeneous first-order linear constant coefficient ordinary differential

equation:
du
= cu + x2 .
dx

Homogeneous second-order linear ordinary differential equation:

d2 u du
− x + u = 0.
dx2 dx

Homogeneous second-order linear constant coefficient ordinary differential

equation describing the harmonic oscillator:
d2 u
2
+ ω 2 u = 0.
dx

Inhomogeneous first-order nonlinear ordinary differential equation:

du
= u2 + 4.
dx

Second-order nonlinear (due to sine function) ordinary differential equation

describing the motion of a pendulum of length L:
d2 u
L + g sin u = 0.
dx2

In the next group of examples, the unknown function u depends on two

variables x and t or x and y.
Homogeneous first-order linear partial differential equation:
∂u ∂u
+t = 0.
∂t ∂x
7
Homogeneous second-order linear constant coefficient partial differential
equation of elliptic type, the Laplace equation:

∂ 2u ∂ 2u
+ = 0.
∂x2 ∂y 2

∂u ∂u ∂ 3 u
= 6u − .
∂t ∂x ∂x3

8
Chapter 2

Partial Differential Equations

In this chapter we are going to take a very brief look at one of the more
common methods for solving simple partial differential equations. The
method we’ll be taking a look at is that of Separation of Variables.

We need to make it very clear before we even start this chapter that we
are going to be doing nothing more than barely scratching the surface of
not only partial differential equations but also of the method of separation
of variables. It would take several classes to cover most of the basic tech-
niques for solving partial differential equations. The intent of this chapter
is to do nothing more than to give you a feel for the subject and if you’d
like to know more taking a class on partial differential equations should
probably be your next step.

Also note that in several sections we are going to be making heavy use
of some of the results from the previous chapter. That in fact was the
point of doing some of the examples that we did there. Having done them
will, in some cases, significantly reduce the amount of work required in
some of the examples we’ll be working in this chapter. When we do make
use of a previous result we will make it very clear where the result is com-
ing from.
Here is a brief listing of the topics covered in this chapter.

2.1 NOTATION OF PDEs

In PDEs, partial derivatives are usually denoted as

∂u
Ux = ,
∂x
∂ 2u
Uxx = 2 ,
∂x
9
 ∂ 2u ∂ ∂u
Uxy = = ( ).
∂y∂x ∂y ∂x

2.2 EXAMPLES OF PDEs

There are some examples :

1-Cauchy-Riemen equation:
∂u ∂v
= ,
∂x ∂y
∂v ∂u
=− .
∂x ∂y
2-Heat equation:
∂T
= k 52 ψ.
∂t
3-Laplace equation:
52 ψ = 0.
4-Tricomi equation:
Uyy = yUxx .
5-Wave equation:
1 ∂ 2ψ
52 ψ = .
v 2 ∂t2

2.3 CLASSIFICATION OF PDEs

2.3.1 1st ORDER PARTIAL DIFFERENTIAL EQUATION

A partial differential equation which involves only first order derivatives

of the unknown function of n variables.The equation takes the form

F (x1 , ..., xn , u, ux1 , ...., uxn ) = 0.

For example

∂u ∂u
− = 0,
∂x ∂y

10
 ∂u 3 ∂u
( ) + + u4 = 0.
∂x1 ∂x2

2.3.2 2nd ORDER PARTIAL DIFFERENTIAL EQUATION

For numerical solution of PDEs, the classification of 2nd order PDEs is

most important.

A(x, y)Uxx + 2B(x, y)Uxy + C(x, y)Uyy = F (x, y, UX , UY , U )

1.Elliptic:
AC > B 2
For example,Laplace’s equation
Uxx + Uyy = 0
where
A = C = 1, B = 0
2.Hyperbolic:
AC < B 2
For example, the one dimensional wave equation:
1
Uxx = Utt
c2
where
1
A = 1, C = − 2 , B = 0
c
3.Parabolic:
AC = B 2
For example,the heat and difusion equation
Ut = βUxx

11
Chapter 3

WAVE EQUATION

3.1 INTRODUCTION TO WAVE EQUATION

The wave equation is a 2nd order linear hyperbolic partial differential equa-
tion that describes the variety of waves,which are sound waves or water
waves.The wave equation specify function U = U (r, t), r ∈ Rn which sat-
isfies:
∂ 2u
2
= c2 52 U (3.1)
∂t
here 52 denotes the Laplacian in Rn and c is a constant speed of the wave
propagation.Eq 2.1 is given

D2u = o

2 1 ∂2
2
where D = 5 − 2 2 is the d’Alemberitian.
c ∂t

3.2 1-D WAVE EQUATION

The wave equation for scaler U in the 1-D is

Utt = −c2 Uxx = 0 (3.2)

or
∂ 2u 2
2∂ u
= c
∂t2 ∂x2
This is the hyperbolic equation since
A = 1, C = c2 , B = 0
so that
AC < B 2

12
.The above equation can be solved by d’Alembert’s method and by using
separation of variables.

3.2.1 INITIAL CONDITIONS

U (x, o) = f (x)
Ut (x, t) = g(x)

3.2.2 BOUNDARY CONDITIONS

U (0, t) = 0
U (L, t) = 0

3.2.3 D’ALEMBERT’S SOLUTION OF 1-D WAVE EQUATION

Using transformation,we can use new coordinates(ξ, η)

ξ = x − ct, η = x + ct

In the new coordinate system,we can write as

UXX = Uξξ + 2Uξη + Uηη

1
Utt = Uξξ − 2Uξη + Uηη
c2
Wave equation is

Utt − c2 Uxx = 0

By putting the value of Uxx and Utt then

Uξξ + 2Uξη + Uηη = Uξξ − 2Uξη + Uηη

2U ξη + 2Uξη = 0

Uξη = 0
∂ 2u
=0 (3.3)
∂ξ∂η

The function U remains constant along the curve (2.3),i.e.Eq.(2.3) express

13
 ∂u
characteristic curves of the wave equation (2.3).The derivative does
∂ξ
not depend on η,i.e.

∂ ∂u ∂u
( )=0⇔ = f (ξ)
∂η ∂ξ ∂ξ
Now integrating the above equation w.r.t ξ,we get
R
U= f (ξ)dξ + f (η)

U = φ(ξ) + ψ(η)

U (x, t) = φ(x + ct) + ψ(x − ct) (3.4)

U (x, 0) = f (x) put in eq (2.4)

U (x, 0) = φ(x) + ψ(x) = f (x) (3.5)

Differentiate eq.(2.4) w.r.t t

Ut (x, t) = cφ0 (x + ct) − cψ 0 (x − ct)

Ut (x, 0) = cφ0 (x) − cψ 0 (x) = g(x) (3.6)

By differentiating eq.(2.5) and multiply by c

cφ0 (x) + cψ 0 (x) = cf 0 (x) (3.7)

adding eq.(2.6)and(2.7)

2cφ0 (x) = cf 0 (x) + g(x)

1 1
φ0 (x) = f 0 (x) + g(x)
2 2c
14
Integrate w.r.t x
Z
1 1
φ(x) = f (x) + g(x)dx + k3 (3.8)
2 2c

Subtracting eq.(2.6)and(2.7)
1 1
ψ 0 (x) = f 0 (x) − g(x)
2 2c
Integrate with respect to x
Z
1 1
ψ(x) = f (x) − g(x)dx + k4 (3.9)
2 2c

Adding eq.(2.8)and(2.9)

φ(x) + ψ(x) = f (x) + k3 + k4 (3.10)

Comparing eq.(2.5)and(2.6)

f (x) = f (x) + k3 + k4

k3 + k4 = 0

k3 = k4 = k(say)

By x = z eq.(8)become
1 1 Rx
φ(x) = f (x) + g(z)dz + k
2 2c 0
By x = z eq.(9) become
1 1 Rx
ψ(x) = f (x) − g(z)dz + k
2 2c 0
U (x, t) = φ(x + ct) + ψ(x − ct) put in above eq.

15
 Z x+ct
1 1
φ(x) = (x + ct) + g(z)dz + k (3.11)
2 2c 0

Z x+ct
1 1
ψ(x) = (x + ct) − g(z)dz − k (3.12)
2 2c 0

Adding eq.(2.11)and(2.12)
1 1 R x+ct 1 1 R x+ct
φ(x) + ψ(x) = (x + ct) + g(z)dz + (x + ct) − g(z)dz
2 2c 0 2 2c 0

3.2.4 SEPARATION OF VARIABLES

The analytical solution of the 1-D wave equation by using separation of

variables, we want to solve the 1-D wave equation:

Utt = cUxx (3.13)

with boundary condition U (0, t) = 0 = U (l, t)

let assume U (x, t) = X(x)T (t) then substitute into eq.(2.13)

X(x)T 00 (t) = c2 X 00 (x)T (t)

then divide by XT ⇒

T 00 X 00
= c2 = −ω 2 (constant)
T X
ω
Solving X 00 = −k 2 X,where k = f orX(x) gives:
c
X = Asin(kx) + Bcos(kx)

By using boundary conditions X(0) = B = 0andX(l) = AsinkL = 0 ⇒

π
k = kn = n , n = 0, 1, ... thus the general solution for X(x) is
L
P nπx
X(x) = n an sin( )
L

16
Similarly if we solve T 00 = −ωn2 T (whereωn = ckn ) we find the general
solution
T (t) = C sin(ωn t) + D cos(ωn t)

so the solution for U (x, t) is:

U (x,
P t) = X(x)T (t)
= n [an sin(ωn t) + bn cos(ωn t)] sin(kn x)

where an , bn are given by initial conditions:

∂u
U (x, o) = Uo (x),(x, t) = Vo (x)
∂t
P P
⇒ Uo = n bn sin(kn x),Vo = n an ωn sin(kn x)
RL
Using orthogonality of sin functions: 0 sin(km x) sin(kn x)dx = δnm ⇒
2 RL
bm = Uo (x) sin(km x)dx
L 0
2 RL
am = V0 (x) sin(km x)dx
ωm L 0
nπ mπ
Where kn = and km =
L L

3.2.5 EXAMPLE
∂ 2u 2
2∂ u
(x, t) = c (x, t) for all 0 < x < 1 and t > 0
∂t2 ∂x2
U (x, t) = U (1, t) = 0 for all t > 0

U (x, 0) = x(1 − x), Ut (x, 0) = 0 for all 0 < x < 1

Solution:

l = 1, f (x) = x(1 − x) and g(x) = 0

∞
X
U (x, y) = sin(kπx)[αk cos(ckπt) + βk sin(ckπt)] (3.14)
k=1

17
 R1
Where αk = 2 0 x(1 − x) sin(kπx)dx
Z 1
αk = 2 (x − x2 ) sin(kπx)dx (3.15)
0
R1
βk = 2 0 0 sin(kπx)dx = 0

Consider
R1 1 d
R1
0 x sin(kπx)dx =0 −
cos(kπx)dx
π dk
1 R1 d
=− 0 cos(kπx)dx
π dk
1
= − cos(kπ)
kπ
R1 2 R 1 1 d2
0 x sin(kπx)dx = 0 − π 2 dk 2 sin(kπx)dx

2 − k2π2 2
= cos(kπ) 3 3 − 3 3
k π k π
We have
R1
αk = 2 0 (x − x2 ) sin(kπx)dx

1 2 − k2π2 2
= 2[− cos(kπ) − cos(kπ) 3 3 − 3 3 ]
kπ k π k π
4
= 3 3 [1 − cos(kπ)]
k π
eq.(2.14) becomes
P∞ 8
U (x, y) = k=1 3 3 sin(kπx) cos(ckπt)
k π

3.3 2-D WAVE EQUATION

The wave equation for the scaler U in the 2-D is

Utt = β(Uxx + Uyy ) (3.16)

18
0 ≤ x ≤ a,0 ≤ y ≤ b,0 ≤ t ≤ T

This is a hyperbolic equation where A = 1, C = −c2 , B = 0 so that

AC < B 2 .
The two-dimensional wave equation (2.15) can be solved by separation of
variables.

3.3.1 The Heat Equation

In this section we will do a partial derivation of the heat equation that can
be solved to give the temperature in a one dimensional bar of lengt.
In addition, we give several possible boundary conditions that can be used
in this situation. We also define the Laplacian in this section and give a
version of the heat equation for two or three dimensional situations.

3.3.2 The Wave Equation

In this section we do a partial derivation of the wave equation which can

be used to find the one dimensional displacement of a vibrating string. In
addition, we also give the two and three dimensional version of the wave
equation.

3.3.3 Separation of Variables

In this section show how the method of Separation of Variables can be

applied to a partial differential equation to reduce the partial differen-
tial equation down to two ordinary differential equations. We apply the
method to several partial differential equations. We do not, however, go
any farther in the solution process for the partial differential equations.
That will be done in later sections. The point of this section is only to
illustrate how the method works.

3.3.4 Solving the Heat Equation

In this section we go through the complete separation of variables process,

including solving the two ordinary differential equations the process gener-
ates. We will do this by solving the heat equation with three different sets
of boundary conditions. Included is an example solving the heat equation
on a bar of length but instead on a thin circular ring.

19
3.3.5 Heat Equation with Non-Zero Temperature Boundaries

In this section we take a quick look at solving the heat equation in which
the boundary conditions are fixed, non-zero temperature. Note that this is
in contrast to the previous section when we generally required the bound-
ary conditions to be both fixed and zero.

3.3.6 Laplace’s Equation

In this section we discuss solving Laplace’s equation. As we will see this

is exactly the equation we would need to solve if we were looking to find
the equilibrium solution (i.e. time independent) for the two dimensional
heat equation with no sources. We will also convert Laplace’s equation to
polar coordinates and solve it on a disk of radius.

3.3.7 Vibrating String

In this section we solve the one dimensional wave equation to get the
displacement of a vibrating string.

3.4 Existence of Solutions

Solving differential equations is not like solving algebraic equations. Not

only are their solutions often unclear, but whether solutions are unique or
exist at all are also notable subjects of interest.

For first order initial value problems, the Peano existence theorem gives
one set of circumstances in which a solution exists.
Given any point (a, b) in the xy-plane, define some rectangular region Z,
such that Z = [l, m] × [n, p] and (a, b) is in the interior of Z. If we are
dy
given a differential equation = g(x, y) and the condition that y = b
dx
when x = a , then there is locally a solution to this problem if g(x, y) and
∂g
are both continuous on Z. This solution exists on some interval with
∂x
its center at a. The solution may not be unique.

However, this only helps us with first order initial value problems. Suppose
we had a linear initial value problem of the nth order:

20
 dn y dy
fn (x) n + · · · + f1 (x) + f0 (x)y = g(x)
dx dx

such that

y(x0 ) = y0 , y 0 (x0 ) = y00 , y 00 (x0 ) = y000 , · · ·

For any nonzero fn (x), if {f0 , f1 , · · · } and g are continuous on some inter-
val containing x0 , y is unique and exists.

3.5 Connection to Difference Equations

The theory of differential equations is closely related to the theory of dif-

ference equations, in which the coordinates assume only discrete values,
and the relationship involves values of the unknown function or functions
and values at nearby coordinates. Many methods to compute numerical
solutions of differential equations or study the properties of differential
equations involve the approximation of the solution of a differential equa-
tion by the solution of a corresponding difference equation.

3.6 Applications

The study of differential equations is a wide field in pure and applied

mathematics, physics, and engineering. All of these disciplines are con-
cerned with the properties of differential equations of various types. Pure
mathematics focuses on the existence and uniqueness of solutions, while
applied mathematics emphasizes the rigorous justification of the methods
for approximating solutions. Differential equations play an important role
in modelling virtually every physical, technical, or biological process, from
celestial motion, to bridge design, to interactions between neurons. Dif-
ferential equations such as those used to solve real-life problems may not
necessarily be directly solvable, i.e. do not have closed form solutions.
Instead, solutions can be approximated using numerical methods.

21
 Many fundamental laws of physics and chemistry can be formulated
as differential equations. In biology and economics, differential equations
are used to model the behavior of complex systems. The mathematical
theory of differential equations first developed together with the sciences
where the equations had originated and where the results found applica-
tion. However, diverse problems, sometimes originating in quite distinct
scientific fields, may give rise to identical differential equations.

Whenever this happens, mathematical theory behind the equations can

be viewed as a unifying principle behind diverse phenomena. As an ex-
ample, consider the propagation of light and sound in the atmosphere,
and of waves on the surface of a pond. All of them may be described
by the same second-order partial differential equation, the wave equation,
which allows us to think of light and sound as forms of waves, much like
familiar waves in the water. Conduction of heat, the theory of which was
developed by Joseph Fourier, is governed by another second-order partial
differential equation, the heat equation. It turns out that many diffusion
processes, while seemingly different, are described by the same equation;
the Black–Scholes equation in finance is, for instance, related to the heat
equation.

3.6.1 Physics

Euler–Lagrange equation in classical mechanics

Hamilton’s equations in classical mechanics
Radioactive decay in nuclear physics
Newton’s law of cooling in thermodynamics
The wave equation
The heat equation in thermodynamics
Laplace’s equation, which defines harmonic functions
Poisson’s equation
The geodesic equation
The Navier–Stokes equations in fluid dynamics
The Diffusion equation in stochastic processes
The Convection–diffusion equation in fluid dynamics
The Cauchy–Riemann equations in complex analysis
The Poisson–Boltzmann equation in molecular dynamics
The shallow water equations
Universal differential equation

22
The Lorenz equations whose solutions exhibit chaotic flow.

3.6.2 Biology

Verhulst equation – biological population growth

von Bertalanffy model – biological individual growth
Replicator dynamics – found in theoretical biology
Hodgkin–Huxley model – neural action potentials

3.6.3 Chemistry

The rate law or rate equation for a chemical reaction is a differential equa-
tion that links the reaction rate with concentrations or pressures of re-
actants and constant parameters (normally rate coefficients and partial
reaction orders). To determine the rate equation for a particular system
one combines the reaction rate with a mass balance for the system. In
addition, a range of differential equations are present in the study of ther-
modynamics and quantum mechanics.

3.6.4 Economics

The key equation of the Solow–Swan model is

∂k(t)
= s[k(t)]α − δk(t)
∂t

The Black–Scholes PDE

Malthusian growth model
The Vidale–Wolfe advertising model

3.7 Black-Scholes Model

The Black–Scholes or Black–Scholes–Merton model is a mathematical model

for the dynamics of a financial market containing derivative investment in-
struments. From the partial differential equation in the model, known as
the Black–Scholes equation, one can deduce the Black–Scholes formula,
which gives a theoretical estimate of the price of European-style options

23
and shows that the option has a unique price regardless of the risk of
the security and its expected return (instead replacing the security’s ex-
pected return with the risk-neutral rate). The formula led to a boom in
options trading and provided mathematical legitimacy to the activities of
the Chicago Board Options Exchange and other options markets around
the world. It is widely used, although often with adjustments and correc-
tions, by options market participants.

Based on works previously developed by market researchers and practi-

tioners, such as Louis Bachelier, Sheen Kassouf and Ed Thorp among
others, Fischer Black and Myron Scholes proved in the late 1960s that a
dynamic revision of a portfolio removes the expected return of the security,
thus inventing the risk neutral argument. In 1970, after they attempted
to apply the formula to the markets and incurred financial losses due to
lack of risk management in their trades, they decided to focus in their
domain area, the academic environment. After three years of efforts, the
formula named in honor of them for making it public, was finally published
in 1973 in an article entitled ”The Pricing of Options and Corporate Lia-
bilities”, in the Journal of Political Economy. Robert C. Merton was the
first to publish a paper expanding the mathematical understanding of the
options pricing model, and coined the term ”Black–Scholes options pricing
model”. Merton and Scholes received the 1997 Nobel Memorial Prize in
Economic Sciences for their work, the committee citing their discovery of
the risk neutral dynamic revision as a breakthrough that separates the
option from the risk of the underlying security. Though ineligible for the
prize because of his death in 1995, Black was mentioned as a contributor
by the Swedish Academy.

The key idea behind the model is to hedge the option by buying and
selling the underlying asset in just the right way and, as a consequence, to
eliminate risk. This type of hedging is called ”continuously revised delta
hedging” and is the basis of more complicated hedging strategies such as
those engaged in by investment banks and hedge funds.

The model’s assumptions have been relaxed and generalized in many di-
rections, leading to a plethora of models that are currently used in deriva-
tive pricing and risk management. It is the insights of the model, as exem-
plified in the Black–Scholes formula, that are frequently used by market

24
participants, as distinguished from the actual prices. These insights in-
clude no-arbitrage bounds and risk-neutral pricing (thanks to continuous
revision). Further, the Black–Scholes equation, a partial differential equa-
tion that governs the price of the option, enables pricing using numerical
methods when an explicit formula is not possible.

The Black–Scholes formula has only one parameter that cannot be di-
rectly observed in the market: the average future volatility of the underly-
ing asset, though it can be found from the price of other options. Since the
option value (whether put or call) is increasing in this parameter, it can
be inverted to produce a ”volatility surface” that is then used to calibrate
other models, e.g. for OTC derivatives.

3.8 The Black-Scholes World

The Black–Scholes model assumes that the market consists of at least one
risky asset, usually called the stock, and one riskless asset, usually called
the money market, cash, or bond.

Now we make assumptions on the assets (which explain their names):

(riskless rate) The rate of return on the riskless asset is constant and
thus called the risk-free interest rate. (random walk) The instantaneous
log return of stock price is an infinitesimal random walk with drift; more
precisely, it is a geometric Brownian motion, and we will assume its drift
and volatility are constant (if they are time-varying, we can deduce a suit-
ably modified Black–Scholes formula quite simply, as long as the volatility
is not random). The stock does not pay a dividend.

Assumptions on the market:

There is no arbitrage opportunity (i.e., there is no way to make a riskless
profit).
It is possible to borrow and lend any amount, even fractional, of cash at
the riskless rate.
It is possible to buy and sell any amount, even fractional, of the stock (this
includes short selling).
The above transactions do not incur any fees or costs (i.e., frictionless

25
market).

With these assumptions holding, suppose there is a derivative security also

trading in this market. We specify that this security will have a certain
payoff at a specified date in the future, depending on the value(s) taken
by the stock up to that date. It is a surprising fact that the derivative’s
price is completely determined at the current time, even though we do not
know what path the stock price will take in the future. For the special
case of a European call or put option, Black and Scholes showed that ”it
is possible to create a hedged position, consisting of a long position in the
stock and a short position in the option, whose value will not depend on
the price of the stock”. Their dynamic hedging strategy led to a partial
differential equation which governed the price of the option. Its solution
is given by the Black–Scholes formula.
Several of these assumptions of the original model have been removed in
subsequent extensions of the model. Modern versions account for dynamic
interest rates (Merton, 1976),[citation needed] transaction costs and taxes
(Ingersoll, 1976),[citation needed] and dividend payout.

3.9 Black-Scholes Equation

As above, the Black–Scholes equation is a partial differential equation,

which describes the price of the option over time. The equation is:

∂V 1 ∂ 2V ∂V
+ σ 2 S 2 2 + rS − rV = 0
∂t 2 ∂S ∂S

The key financial insight behind the equation is that one can perfectly
hedge the option by buying and selling the underlying asset in just the
right way and consequently ”eliminate risk”. This hedge, in turn, im-
plies that there is only one right price for the option, as returned by the
Black–Scholes formula.

3.10 Black-Scholes Formula

The Black–Scholes formula calculates the price of European put and call
options. This price is consistent with the Black–Scholes equation as above;

26
this follows since the formula can be obtained by solving the equation for
the corresponding terminal and boundary conditions.
The value of a call option for a non-dividend-paying underlying stock
in terms of the Black–Scholes parameters is:
C(St , t) = N (d1 )St − N (d2 )Ke−r(T −t)
σ2
     
1 St
d1 = √ ln + r+ (T − t)
σ T −t K 2
√
d2 = d1 − σ T − t

The price of a corresponding put option based on put–call parity is:

P (St , t) = Ke−r(T −t) − St + C(St , t)
= N (−d2 )Ke−r(T −t) − N (−d1 )St

For both, as above:

N (·) is the cumulative distribution function of the standard normal dis-
tribution
T − t is the time to maturity (expressed in years)
St is the spot price of the underlying asset
K is the strike price
r is the risk free rate (annual rate, expressed in terms of continuous com-
pounding)
σ is the volatility of returns of the underlying asset

3.10.1 Alternative Formulation

Introducing some auxiliary variables allows the formula to be simplified

and reformulated in a form that is often more convenient:

C(F, τ ) = D (N (d+ )F − N (d− )K)

   
1 F 1 2
d± = √ ln ± σ τ
σ τ K 2
√
d± = d∓ ± σ τ

The auxiliary variables are:

τ = T − t is the time to expiry (remaining time, backwards time)
D = e−rτ is the discount factor
S
F = erτ S = is the forward price of the underlying asset, and S = DF
D

27
 Given put–call parity, which is expressed in these terms as:

C − P = D(F − K) = S − DK
the price of a put option is:

P (F, τ ) = D [N (−d− )K − N (−d+ )F ]

3.11 Interpretation

The Black–Scholes formula can be interpreted fairly handily, with the main
subtlety the interpretation of the N (d± ) (and a fortiori d± terms, partic-
ularly d+ and why there are two different terms.

The formula can be interpreted by first decomposing a call option into

the difference of two binary options: an asset-or-nothing call minus a
cash-or-nothing call (long an asset-or-nothing call, short a cash-or-nothing
call). A call option exchanges cash for an asset at expiry, while an asset-
or-nothing call just yields the asset (with no cash in exchange) and a
cash-or-nothing call just yields cash (with no asset in exchange). The
Black–Scholes formula is a difference of two terms, and these two terms
equal the value of the binary call options. These binary options are much
less frequently traded than vanilla call options, but are easier to analyze.
Thus the formula:

C = D [N (d+ )F − N (d− )K]

breaks up as:

C = DN (d+ )F − DN (d− )K

where DN (d+ )F is the present value of an asset-or-nothing call and DN (d− )K

is the present value of a cash-or-nothing call. The D factor is for discount-
ing, because the expiration date is in future, and removing it changes
present value to future value (value at expiry). Thus N (d+ ) F is the fu-
ture value of an asset-or-nothing call and N (d− ) K is the future value of

28
a cash-or-nothing call. In risk-neutral terms, these are the expected value
of the asset and the expected value of the cash in the risk-neutral measure.

The naive, and not quite correct, interpretation of these terms is that
N (d+ )F is the probability of the option expiring in the money N (d+ ),
times the value of the underlying at expiry F, while N (d− )K is the prob-
ability of the option expiring in the money N (d− ), , times the value of the
cash at expiry K. This is obviously incorrect, as either both binaries expire
in the money or both expire out of the money (either cash is exchanged
for asset or it is not), but the probabilities N (d+ ) and N (d− ) are not equal.

In fact, d± can be interpreted as measures of moneyness (in standard

deviations) and N (d± ) as probabilities of expiring ITM (percent money-
ness), in the respective numéraire, as discussed below. Simply put, the
interpretation of the cash option, N (d− )K, is correct, as the value of the
cash is independent of movements of the underlying, and thus can be inter-
preted as a simple product of ”probability times value”, while the N (d+ )F
is more complicated, as the probability of expiring in the money and the
value of the asset at expiry are not independent. More precisely, the value
of the asset at expiry is variable in terms of cash, but is constant in terms
of the asset itself (a fixed quantity of the asset), and thus these quanti-
ties are independent if one changes numéraire to the asset rather than cash.

In detail, the terms are the probabilities of the option expiring in-the-
money under the equivalent exponential martingale probability measure
(numéraire=stock) and the equivalent martingale probability measure (numéraire=risk
free asset), respectively. The risk neutral probability density
for the stock price ST ∈ (0, ∞) is is defined as above.
Specifically, N (d2 ) is the probability that the call will be exercised provided
one assumes that the asset drift is the risk-free rate. N (d1 ), however, does
not lend itself to a simple probability interpretation. SN (d1 ) is correctly
interpreted as the present value, using the risk-free interest rate, of the
expected asset price at expiration, given that the asset price at expiration
is above the exercise price. For related discussion – and graphical repre-
sentation – see section ”Interpretation” under Datar–Mathews method for
real option valuation.

The equivalent martingale probability measure is also called the risk-

29
neutral probability measure. Note that both of these are probabilities
in a measure theoretic sense, and neither of these is the true probability
of expiring in-the-money under the real probability measure. To calculate
the probability under the real (”physical”) probability measure, additional
information is required—the drift term in the physical measure, or equiv-
alently, the market price of risk.

30
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