Finite difference schemes with exact recovery of vanilla option prices

Peter Austing
10 Nov 2020

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Peter Austing shows how to set up finite difference solvers to exactly recover the prices of all vanilla options on the grid. The approach leads to a specific discretisation of Dupire’s formula. It can be applied to local stochastic volatility and interest rate hybrid models and eliminates many of the convergence and stability issues that arise in the partial differential equation approach to exotics pricing

Finite difference schemes are widely used in quantitative

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