Frequently Asked Questions In Quantitative Finance

140 Frequently Asked Questions In Quantitative Finance

S

t

This option

value

is calculated from

these three

Figure 2-8:The relationship between option values in the explicit

method.

to work backwards from expiry to calculate the option

value today, one time step at a time.

The above is the most elementary form of the finite-

difference methods, there are many other more sophis-

ticated versions.

The advantages of the finite-difference methods are in

their speed for low-dimensional problems, those with