A pedagogical demonstration is given of how the Feynman path integral (or functional integral) formalism can be used to obtain the pricing kernel in Black-Scholes theory. First, a brief introduction is given of the relevant area of quantum mechanics and the Heisenberg Uncertainty Principle. Next, the conceptual foundations of fluctuations are discussed both from the operator viewpoint and also from the Least Action Principle. After this the path integral formalism is set up in a way suitable for explicit calculations. Finally, the pricing kernel in option pricing for the Black-Scholes process is derived using the path integral formalism.

Attachment: A Working Knowledge of Functional Integration

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