O'Reilly logo

Numerical Methods and Optimization in Finance by Enrico Schumann, Dietmar Maringer, Manfred Gilli

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter Four

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 ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required