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 0: Intro Video on how to set up Visual Studio C++ on Your Lap Top
DAY 1: 09.00 – 18:00
- Introduction: The theta scheme for one dimensional partial differential equations. Derivation and formal properties.
- Coding the different components for the theta solver.
- Interfacing to excel and doing some basic tests:
- Duality between backward and forward solution.
- Grid width.
- Grid node placement and smoothing.
- Convergence plots.