Explain finite-difference method in finance
Explain finite-difference method in finance.
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Financial problems starting from stochastic differential equations as models for quantities developing randomly, like equity prices or interest rates, are using the language of calculus. We refer, in calculus to gradients, slopes, rates of change and sensitivities. Such mathematical ‘derivatives’ explain how fast a dependent variable, changes as one of the independent variables, as an option value, as an equity price and changes. These sensitivities are technically explained as the ratio of the infinitesimal change in the dependent variable to the infinitesimal change into the independent.
And we need an infinite number of such infinitesimals to explain an entire curve. Nonetheless, when trying to compute these slopes numerically, on a computer, for illustration, we cannot deal along with infinites and infinitesimals, and have to resort to estimates.
Illustrates an example of Efficient Markets Hypothesis?
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Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1 payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of Year 4. Your friend sa
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