Finite Difference Methods
Publisher Summary
This chapter is intended as a simple introduction to finite difference methods for financial applications. The option prices is computed with a numerical method, and the analytical prices serves as a benchmark. In order to apply a numerical method, one needs to define the domain, that is, the range of the variables t and S, for which one wants to solve the partial differential equations and specify the initial and boundary conditions. Then these prices are known exactly.
Explicit method; Implicit method; Crank–Nicolson; θ-method; Initial conditions; Boundary conditions; American option; Early exercise boundary; Barrier option
Many finance problems, in particular in option pricing, lead ...
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