What is backward equation

What is backward equation?

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The backward equation termed as also the backward Kolmogorov equation it is

∂p/∂t + ½ B(y,t)22p/∂y2 + A(y,t) ∂p/∂y = 0

This should be solved backwards in t with given last data.

For illustration, if we wish to compute the expected value of a few functions F(S) at time T we should solve this equation for the function p(S, t) along with

p(S, T) = F(S).

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