Functional form of coefficients in finite-difference methods
Explain the term functional form of coefficients in finite-difference methods.
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Functional form of coefficients: The main difference between a single-factor interest rate option problem and an equity option problem is in the functional form of the volatility and the drift rate. These appear during the governing partial differential equations like coefficients.
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A stock whose value is now $44.75 is growing on average by 15 percent per annum. Its volatility is 22 percent. The interest rate is 4 percent. You need to value a call option along with a strike of $45, expiring in two months’ time. So, what can you do?
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