The trade-offs between alternative finite difference techniques used to price derivative securities

摘要

Approximating partial differential equations (PDEs) using the finite difference method (FDM) is a common occurrence in contingent claim asset pricing. Past studies have stated that an explicit scheme is being used when a mixed (a combination of an explicit and implicit) scheme is actually being implemented. This study explores the financial and mathematical consequences of using this commonly found method with other FDM approaches. The consequences on valuation and risk management are also briefly addressed.