Stochastic flow approach to Dupire's formula (Q2463720)

Recently, \textit{B. Dupire} [Risk Mag. 7, 18--20 (1994)] obtained partial differential equation satisfied by the call pricing function in the maturity and strike variables. This PDE can be interpreted as the pricing PDE for a put option and this leads to the put-call duality. The authors give a direct probabilistic proof for the generalization of this result in the framework of local volatility models including exponential Lévy jumps. The proof is based on stochastic flow arguments. Stochastic flows are used to check the equivalent interpretation of generalized Dupire's PDE corresponding to binary options and options written on two assets. The barrier options in the absence of jumps are also considered.