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Write $T=t_0$, $B_t=e^{-\rho (T-t)}$, and let $V_t=f(S_t,t)$ with $f(x,t)=xg(x,t)+B_{t}h(x,t)$. The portfolio holds $g(S_t,t)$ shares of stock and $h(S_t,t)$ units of the zero-coupon bond. It is self-financing when all changes of holdings are funded within it, which is the gain identityUnder the physical probability measure, write $d{S}_t=\mu S_{t}dt+\sigma S_{t}d{W}_t$, where $\sigma >0$ and $d{B}_t=\rho B_{t}dt$. The Itô formula givesMatching the Brownian motion coefficients forces $f_x=g$. Since $f_x=g+x{g}_x+B_t{h}_x$, this is preciselyDifferentiating $f_x=g$ gives $f_{xx}=g_x$. Since $f_t=x{g}_t+\rho B_{t}h+B_t{h}_t$, matching the drift coefficients now givesThese are the self-financing conditions for smooth stock and bond holdings. Conversely, substituting both identities into the Itô formula gives the gain identity, so they are sufficient as well. Smoothness and the positive lognormal distribution density of $S_t$ extend the identities along the price process to every $x>0$, with boundary times obtained by continuity.

The portfolio with constant stock value in bond units must have $xg(x,t)=\theta B_t$, so $g(x,t)=\theta B_t/x$. The first condition then gives $h_x=\theta /x$, henceThe second condition reduces to $c^{\prime }(t)=\theta ({\sigma }^2/2-\rho )$. Initial portfolio wealth requires $h(S_0,0)=w_0/B_0-\theta =w_0{e}^{\rho T}-\theta$. Therefore the holdings areThe corresponding portfolio wealth isUnder the risk-neutral measure, $\log (S_t/S_0)=(\rho -{\sigma }^2/2)t+\sigma W_t^Q$, so its value in zero-coupon bond units is $V_t/B_t=w_0{e}^{\rho T}+\theta \sigma W_t^Q$. This also verifies the self-financing gain equation after using the bond as numéraire.

A self-financing portfolio changes its holdings using only its existing wealth. If it holds $g_t$ shares and $h_t$ units of a traded bond or bank account $B_t$, its value $V_t=g_t{S}_t+h_t{B}_t$ obeys the gain identityThe changes in holdings do not add or withdraw capital. Set $T=t_0$, $B_t=e^{-\rho (T-t)}$, so $d{B}_t=\rho B_{t}dt$, and let $d{S}_t=\mu S_{t}dt+\sigma S_{t}d{W}_t$, with $\sigma >0$. Write $V_t=p(S_t,t)$ and suppress the arguments of the smooth holdings $g,h$.

Differentiate $p=xg+B_{t}h$:The Itô formula minus the proposed portfolio gains givesUniqueness of the local-martingale and finite-variation decomposition shows that self-financing requires $p_x=g$. Since $S_t$ has full support on $(0,\infty )$ for each $t>0$, smoothness gives the corresponding functional identity for every positive $x$, and continuity extends it to the interval endpoints. ThusDifferentiating this identity once more in $x$ gives $g_x+x{g}_{xx}+B_t{h}_{xx}=0$, so $p_{xx}=g_x$. Substitute both identities into the drift condition to obtainConversely these equations give $p_x=g$, $p_{xx}=g_x$ and zero drift and diffusion in the displayed gain difference. They therefore prove the claimed self-financing conditions for smooth stock and bond holdings in both directions.

Using $B_{t}h=p-xg$ in the gain identity and setting $g=p_x$, self-financing impliesThis is the Black-Scholes equation, independent of the physical drift $\mu$. Conversely, if a smooth $p$ satisfies it, define its delta hedge byThe preceding Itô formula verifies that these holdings are self-financing.

For prescribed arbitrary holdings, the value equation alone is insufficient. The corrected equivalence is the Black-Scholes value equation needs delta-compatible holdings: a specified portfolio is self-financing if and only if its value solves the equation and $g=p_x$. Indeed $p=0$, $g=1$, $h=-x/B_t$ satisfies the value equation but its proposed gains are $d{S}_t-\rho S_{t}dt$, which have nonzero Brownian part while $dp=0$. Thus the printed final equivalence is valid as an existence assertion for the delta hedge, not for every decomposition of the same value. No change to the valid two holdings equations is needed.

With continuous underlying stock dividends, the stock's gain is $d{S}_t+\theta S_{t}dt$, so self-financing becomes $d{V}_t=g_t(d{S}_t+\theta S_{t}dt)+h_{t}d{B}_t$. Under the risk-neutral measure the ex-dividend stock drift is $(\rho -\theta )S_t$. Matching its diffusion still gives $g=p_x$, and matching its gain drift gives the Black-Scholes equation with continuous stock dividendsOnly the coefficient of $x{p}_x$ changes. The $-\rho p$ discount term remains, because the claim is financed at the bank rate; there is no separate source term for a dividend paid by the claim itself. The dividends here are paid by the underlying stock.

In the Black-Scholes model, take $B_t=e^{-\rho (T-t)}$ as a zero-coupon bond numéraire. Holding the fixed stock value $\theta B_t$ requires $g_t=\theta B_t/S_t$ shares. The self-financing conditions for smooth stock and bond holdings giveunits of the bond. Since $V_t=g_t{S}_t+h_t{B}_t$, this yields the displayed wealth. Under the risk-neutral measure, $V_t/B_t=w_0/B_0+\theta \sigma W_t^Q$: the discounted gain is a constant multiple of Brownian motion.