What is backward equation

Question

What is backward equation?

Answer 1

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

∂p/∂t + ½ B(y,t)²∂²p/∂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).