This 2 day workshop will be focusing on:
- Learn how to use finite difference methods for option pricing in practice.
- Learn about discrete duality, stability, convergence, grid dimensioning, grid alignment, and how-to-do in practice.
- These concepts will be introduced through experiments with a self-coded one-dimensional PDE solver.
- Upon completion of the course, you will be ready to implement the finite difference method for standard 1D models such as
Black-Scholes, local volatility models, and the Hull-White model.
- … and be ready to go on to harder problems, such as: stochastic local volatility, Cheyette, hybrid models and models for
- option market making.
- In other words: From finite difference zero to hero in two days.
DAY 2: 09.00 – 17:00
- Code fdBwdRunner().
- Code fdFwdRunner().
- Work on exercises:
- Time step convergence of the different theta schemes: implicit, explicit, crank-nicolson
- Early exercise premium for American options: convergence and early exercise boundary.
- Digital options.
- Grid width and spatial convergence.
- Discrete Dupire equation.
- Barrier options.
- Collect results and experiences. Discuss in class.
- Discuss applications: traditional and some new ones.
- Including option market making and margin modeling.
- Have a look at a 2D solver.