Finite Difference Methods in Financial Engineering

A Partial Differential Equation Approach

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Author: Daniel J. Duffy

Publisher: John Wiley & Sons

ISBN: 1118856481

Category: Business & Economics

Page: 464

View: 3064

The world of quantitative finance (QF) is one of the fastest growing areas of research and its practical applications to derivatives pricing problem. Since the discovery of the famous Black-Scholes equation in the 1970's we have seen a surge in the number of models for a wide range of products such as plain and exotic options, interest rate derivatives, real options and many others. Gone are the days when it was possible to price these derivatives analytically. For most problems we must resort to some kind of approximate method. In this book we employ partial differential equations (PDE) to describe a range of one-factor and multi-factor derivatives products such as plain European and American options, multi-asset options, Asian options, interest rate options and real options. PDE techniques allow us to create a framework for modeling complex and interesting derivatives products. Having defined the PDE problem we then approximate it using the Finite Difference Method (FDM). This method has been used for many application areas such as fluid dynamics, heat transfer, semiconductor simulation and astrophysics, to name just a few. In this book we apply the same techniques to pricing real-life derivative products. We use both traditional (or well-known) methods as well as a number of advanced schemes that are making their way into the QF literature: Crank-Nicolson, exponentially fitted and higher-order schemes for one-factor and multi-factor options Early exercise features and approximation using front-fixing, penalty and variational methods Modelling stochastic volatility models using Splitting methods Critique of ADI and Crank-Nicolson schemes; when they work and when they don't work Modelling jumps using Partial Integro Differential Equations (PIDE) Free and moving boundary value problems in QF Included with the book is a CD containing information on how to set up FDM algorithms, how to map these algorithms to C++ as well as several working programs for one-factor and two-factor models. We also provide source code so that you can customize the applications to suit your own needs.

Pricing Derivatives Under Lévy Models

Modern Finite-Difference and Pseudo-Differential Operators Approach

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Author: Andrey Itkin

Publisher: Birkhäuser

ISBN: 1493967924

Category: Mathematics

Page: 308

View: 9076

This monograph presents a novel numerical approach to solving partial integro-differential equations arising in asset pricing models with jumps, which greatly exceeds the efficiency of existing approaches. The method, based on pseudo-differential operators and several original contributions to the theory of finite-difference schemes, is new as applied to the Lévy processes in finance, and is herein presented for the first time in a single volume. The results within, developed in a series of research papers, are collected and arranged together with the necessary background material from Lévy processes, the modern theory of finite-difference schemes, the theory of M-matrices and EM-matrices, etc., thus forming a self-contained work that gives the reader a smooth introduction to the subject. For readers with no knowledge of finance, a short explanation of the main financial terms and notions used in the book is given in the glossary. The latter part of the book demonstrates the efficacy of the method by solving some typical problems encountered in computational finance, including structural default models with jumps, and local stochastic volatility models with stochastic interest rates and jumps. The author also adds extra complexity to the traditional statements of these problems by taking into account jumps in each stochastic component while all jumps are fully correlated, and shows how this setting can be efficiently addressed within the framework of the new method. Written for non-mathematicians, this book will appeal to financial engineers and analysts, econophysicists, and researchers in applied numerical analysis. It can also be used as an advance course on modern finite-difference methods or computational finance.

Introduction to C++ for Financial Engineers

An Object-Oriented Approach

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Author: Daniel J. Duffy

Publisher: John Wiley & Sons

ISBN: 1118856465

Category: Business & Economics

Page: 440

View: 7631

This book introduces the reader to the C++ programming language and how to use it to write applications in quantitative finance (QF) and related areas. No previous knowledge of C or C++ is required -- experience with VBA, Matlab or other programming language is sufficient. The book adopts an incremental approach; starting from basic principles then moving on to advanced complex techniques and then to real-life applications in financial engineering. There are five major parts in the book: C++ fundamentals and object-oriented thinking in QF Advanced object-oriented features such as inheritance and polymorphism Template programming and the Standard Template Library (STL) An introduction to GOF design patterns and their applications in QF Applications The kinds of applications include binomial and trinomial methods, Monte Carlo simulation, advanced trees, partial differential equations and finite difference methods. This book includes a companion website with all source code and many useful C++ classes that you can use in your own applications. Examples, test cases and applications are directly relevant to QF. This book is the perfect companion to Daniel J. Duffy’s book Financial Instrument Pricing using C++ (Wiley 2004, 0470855096 / 9780470021620)

Numerical Solution of Partial Differential Equations

Finite Difference Methods

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Author: Gordon D. Smith

Publisher: Oxford University Press

ISBN: 9780198596509

Category: Mathematics

Page: 337

View: 3220

Substantially revised, this authoritative study covers the standard finite difference methods of parabolic, hyperbolic, and elliptic equations, and includes the concomitant theoretical work on consistency, stability, and convergence. The new edition includes revised and greatly expanded sections on stability based on the Lax-Richtmeyer definition, the application of Pade approximants to systems of ordinary differential equations for parabolic and hyperbolic equations, and a considerably improved presentation of iterative methods. A fast-paced introduction to numerical methods, this will be a useful volume for students of mathematics and engineering, and for postgraduates and professionals who need a clear, concise grounding in this discipline.

Demystifying Exotic Products

Interest Rates, Equities and Foreign Exchange

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Author: Chia Tan

Publisher: John Wiley & Sons

ISBN: 9780470687888

Category: Business & Economics

Page: 272

View: 7196

In recent times, derivatives have been inaccurately labelled the financial weapons of mass destruction responsible for the worst financial crisis in recent history. Inherently complex and perilous for the ill-informed investment professional they can however also be gainfully harnessed. This book is a practical guide to the complexities of exotic products written in simple terms based on the premise that derivatives are not homogenous, and not necessarily dangerous. By exploring common themes behind the construction of various structured products in interest rates, equities and foreign exchange, and investigating the economic environment that promoted the explosive growth of these products, this book will help readers make sense of their relevance in this period of economic uncertainty. Subsequently, by explaining exotic products with simple mathematics, it will aid readers in understanding their potential use in certain investment strategies whilst having a firm control over risk. Exotic products need not be inaccessible. By understanding the products available investors can make informed decisions ensuring features are consistent with their investment objectives and risk preferences. Author Chia Chiang Tan takes readers through the risks and rewards of each product, illustrating when products can damage investment strategies and how to avoid them, leading to suitable, profitable investments. Ultimately, this book will provide practitioners with an understanding of derivatives, enabling them to determine for themselves which products will fit their investment strategy, and how to use them based on the economic environment and inherent risks.

Computational Partial Differential Equations Using MATLAB

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Author: Jichun Li,Yi-Tung Chen

Publisher: CRC Press

ISBN: 9781420089059

Category: Mathematics

Page: 378

View: 2150

This textbook introduces several major numerical methods for solving various partial differential equations (PDEs) in science and engineering, including elliptic, parabolic, and hyperbolic equations. It covers traditional techniques that include the classic finite difference method and the finite element method as well as state-of-the-art numerical methods, such as the high-order compact difference method and the radial basis function meshless method. Helps Students Better Understand Numerical Methods through Use of MATLAB® The authors uniquely emphasize both theoretical numerical analysis and practical implementation of the algorithms in MATLAB, making the book useful for students in computational science and engineering. They provide students with simple, clear implementations instead of sophisticated usages of MATLAB functions. All the Material Needed for a Numerical Analysis Course Based on the authors’ own courses, the text only requires some knowledge of computer programming, advanced calculus, and difference equations. It includes practical examples, exercises, references, and problems, along with a solutions manual for qualifying instructors. Students can download MATLAB code from www.crcpress.com, enabling them to easily modify or improve the codes to solve their own problems.

Partial Differential Equations with Numerical Methods

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Author: Stig Larsson,Vidar Thomee

Publisher: Springer Science & Business Media

ISBN: 3540887067

Category: Mathematics

Page: 262

View: 3060

The main theme is the integration of the theory of linear PDE and the theory of finite difference and finite element methods. For each type of PDE, elliptic, parabolic, and hyperbolic, the text contains one chapter on the mathematical theory of the differential equation, followed by one chapter on finite difference methods and one on finite element methods. The chapters on elliptic equations are preceded by a chapter on the two-point boundary value problem for ordinary differential equations. Similarly, the chapters on time-dependent problems are preceded by a chapter on the initial-value problem for ordinary differential equations. There is also one chapter on the elliptic eigenvalue problem and eigenfunction expansion. The presentation does not presume a deep knowledge of mathematical and functional analysis. The required background on linear functional analysis and Sobolev spaces is reviewed in an appendix. The book is suitable for advanced undergraduate and beginning graduate students of applied mathematics and engineering.

Finite Difference Methods in Heat Transfer

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Author: Necati Ozisik

Publisher: CRC Press

ISBN: 9780849324918

Category: Science

Page: 432

View: 5515

Finite Difference Methods in Heat Transfer presents a clear, step-by-step delineation of finite difference methods for solving engineering problems governed by ordinary and partial differential equations, with emphasis on heat transfer applications. The finite difference techniques presented apply to the numerical solution of problems governed by similar differential equations encountered in many other fields. Fundamental concepts are introduced in an easy-to-follow manner. Representative examples illustrate the application of a variety of powerful and widely used finite difference techniques. The physical situations considered include the steady state and transient heat conduction, phase-change involving melting and solidification, steady and transient forced convection inside ducts, free convection over a flat plate, hyperbolic heat conduction, nonlinear diffusion, numerical grid generation techniques, and hybrid numerical-analytic solutions.

Numerical Solution of Partial Differential Equations in Science and Engineering

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Author: Leon Lapidus,George F. Pinder

Publisher: Wiley-Interscience

ISBN: N.A

Category: Mathematics

Page: 677

View: 5671

"This book was written to provide a text for graduate and undergraduate students who took our courses in numerical methods. It incorporates the essential elements of all the numerical methods currently used extensively in the solution of partial differential equations encountered regularly in science and engineering. Because our courses were typically populated by students from varied backgrounds and with diverse interests, we attempted to eliminate jargon or nomenclature that would render the work unintelligible to any student. Moreover, in response to student needs, we incorporated not only classical (and not so classical) finite-difference methods but also finite-element, collocation, and boundary-element procedures. After an introduction to the various numerical schemes, each equation type--parabolic, elliptic, and hyperbolic--is allocated a separate chapter. Within each of these chapters the material is presented by numerical method. Thus one can read the book either by equation-type or numerical approach."--Preface, page [v].

Numerical Methods for Engineers and Scientists, Second Edition,

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Author: Joe D. Hoffman,Steven Frankel

Publisher: CRC Press

ISBN: 9780824704438

Category: Mathematics

Page: 840

View: 4305

Emphasizing the finite difference approach for solving differential equations, the second edition of Numerical Methods for Engineers and Scientists presents a methodology for systematically constructing individual computer programs. Providing easy access to accurate solutions to complex scientific and engineering problems, each chapter begins with objectives, a discussion of a representative application, and an outline of special features, summing up with a list of tasks students should be able to complete after reading the chapter- perfect for use as a study guide or for review. The AIAA Journal calls the book "...a good, solid instructional text on the basic tools of numerical analysis."

Handbooks in Operations Research and Management Science: Financial Engineering

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Author: John R. Birge,Vadim Linetsky

Publisher: Elsevier

ISBN: 9780080553252

Category: Business & Economics

Page: 1026

View: 9294

The remarkable growth of financial markets over the past decades has been accompanied by an equally remarkable explosion in financial engineering, the interdisciplinary field focusing on applications of mathematical and statistical modeling and computational technology to problems in the financial services industry. The goals of financial engineering research are to develop empirically realistic stochastic models describing dynamics of financial risk variables, such as asset prices, foreign exchange rates, and interest rates, and to develop analytical, computational and statistical methods and tools to implement the models and employ them to design and evaluate financial products and processes to manage risk and to meet financial goals. This handbook describes the latest developments in this rapidly evolving field in the areas of modeling and pricing financial derivatives, building models of interest rates and credit risk, pricing and hedging in incomplete markets, risk management, and portfolio optimization. Leading researchers in each of these areas provide their perspective on the state of the art in terms of analysis, computation, and practical relevance. The authors describe essential results to date, fundamental methods and tools, as well as new views of the existing literature, opportunities, and challenges for future research.

A Compendium of Partial Differential Equation Models

Method of Lines Analysis with Matlab

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Author: William E. Schiesser,Graham W. Griffiths

Publisher: Cambridge University Press

ISBN: 0521519861

Category: Mathematics

Page: 474

View: 1867

Presents numerical methods and computer code in Matlab for the solution of ODEs and PDEs with detailed line-by-line discussion.

Numerical Solution of Partial Differential Equations

An Introduction

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Author: K. W. Morton,D. F. Mayers

Publisher: Cambridge University Press

ISBN: 1139443208

Category: Mathematics

Page: N.A

View: 5962

This is the 2005 second edition of a highly successful and well-respected textbook on the numerical techniques used to solve partial differential equations arising from mathematical models in science, engineering and other fields. The authors maintain an emphasis on finite difference methods for simple but representative examples of parabolic, hyperbolic and elliptic equations from the first edition. However this is augmented by new sections on finite volume methods, modified equation analysis, symplectic integration schemes, convection-diffusion problems, multigrid, and conjugate gradient methods; and several sections, including that on the energy method of analysis, have been extensively rewritten to reflect modern developments. Already an excellent choice for students and teachers in mathematics, engineering and computer science departments, the revised text includes more latest theoretical and industrial developments.

Numerical Methods for Partial Differential Equations

Finite Difference and Finite Volume Methods

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Author: Sandip Mazumder

Publisher: Academic Press

ISBN: 0128035048

Category: Technology & Engineering

Page: 484

View: 6247

Numerical Methods for Partial Differential Equations: Finite Difference and Finite Volume Methods focuses on two popular deterministic methods for solving partial differential equations (PDEs), namely finite difference and finite volume methods. The solution of PDEs can be very challenging, depending on the type of equation, the number of independent variables, the boundary, and initial conditions, and other factors. These two methods have been traditionally used to solve problems involving fluid flow. For practical reasons, the finite element method, used more often for solving problems in solid mechanics, and covered extensively in various other texts, has been excluded. The book is intended for beginning graduate students and early career professionals, although advanced undergraduate students may find it equally useful. The material is meant to serve as a prerequisite for students who might go on to take additional courses in computational mechanics, computational fluid dynamics, or computational electromagnetics. The notations, language, and technical jargon used in the book can be easily understood by scientists and engineers who may not have had graduate-level applied mathematics or computer science courses. Presents one of the few available resources that comprehensively describes and demonstrates the finite volume method for unstructured mesh used frequently by practicing code developers in industry Includes step-by-step algorithms and code snippets in each chapter that enables the reader to make the transition from equations on the page to working codes Includes 51 worked out examples that comprehensively demonstrate important mathematical steps, algorithms, and coding practices required to numerically solve PDEs, as well as how to interpret the results from both physical and mathematic perspectives

Numerical Solution of Differential Equations

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Author: Zhilin Li,Zhonghua Qiao,Tao Tang

Publisher: Cambridge University Press

ISBN: 1107163226

Category: Mathematics

Page: 293

View: 7553

A practical and concise guide to finite difference and finite element methods. Well-tested MATLAB® codes are available online.

Finite Difference Computing with PDEs

A Modern Software Approach

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Author: Hans Petter Langtangen,Svein Linge

Publisher: Springer

ISBN: 3319554565

Category: Computers

Page: 507

View: 4354

This book is open access under a CC BY 4.0 license. This easy-to-read book introduces the basics of solving partial differential equations by means of finite difference methods. Unlike many of the traditional academic works on the topic, this book was written for practitioners. Accordingly, it especially addresses: the construction of finite difference schemes, formulation and implementation of algorithms, verification of implementations, analyses of physical behavior as implied by the numerical solutions, and how to apply the methods and software to solve problems in the fields of physics and biology.

Partial Differential Equations in Action

From Modelling to Theory

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Author: Sandro Salsa

Publisher: Springer Science & Business Media

ISBN: 8847007526

Category: Mathematics

Page: 556

View: 2571

This book is designed as an advanced undergraduate or a first-year graduate course for students from various disciplines. The main purpose is on the one hand to train students to appreciate the interplay between theory and modeling in problems arising in the applied sciences, and on the other hand to give them a solid theoretical background for numerical methods. At the end of each chapter, a number of exercises at different level of complexity is included

Partial Differential Equations: Modeling, Analysis and Numerical Approximation

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Author: Hervé Le Dret,Brigitte Lucquin

Publisher: Birkhäuser

ISBN: 3319270672

Category: Mathematics

Page: 395

View: 7369

This book is devoted to the study of partial differential equation problems both from the theoretical and numerical points of view. After presenting modeling aspects, it develops the theoretical analysis of partial differential equation problems for the three main classes of partial differential equations: elliptic, parabolic and hyperbolic. Several numerical approximation methods adapted to each of these examples are analyzed: finite difference, finite element and finite volumes methods, and they are illustrated using numerical simulation results. Although parts of the book are accessible to Bachelor students in mathematics or engineering, it is primarily aimed at Masters students in applied mathematics or computational engineering. The emphasis is on mathematical detail and rigor for the analysis of both continuous and discrete problems.

Computational Methods in Finance

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Author: Ali Hirsa

Publisher: CRC Press

ISBN: 1439829578

Category: Business & Economics

Page: 444

View: 2609

As today’s financial products have become more complex, quantitative analysts, financial engineers, and others in the financial industry now require robust techniques for numerical analysis. Covering advanced quantitative techniques, Computational Methods in Finance explains how to solve complex functional equations through numerical methods. The first part of the book describes pricing methods for numerous derivatives under a variety of models. The book reviews common processes for modeling assets in different markets. It then examines many computational approaches for pricing derivatives. These include transform techniques, such as the fast Fourier transform, the fractional fast Fourier transform, the Fourier-cosine method, and saddlepoint method; the finite difference method for solving PDEs in the diffusion framework and PIDEs in the pure jump framework; and Monte Carlo simulation. The next part focuses on essential steps in real-world derivative pricing. The author discusses how to calibrate model parameters so that model prices are compatible with market prices. He also covers various filtering techniques and their implementations and gives examples of filtering and parameter estimation. Developed from the author’s courses at Columbia University and the Courant Institute of New York University, this self-contained text is designed for graduate students in financial engineering and mathematical finance as well as practitioners in the financial industry. It will help readers accurately price a vast array of derivatives.