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Mastering Python for Finance by James Ma Weiming

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Finite differences in options pricing

Finite difference schemes are very much similar to trinomial tree options pricing, where each node is dependent on three other nodes with an up movement, a down movement, and a flat movement. The motivation behind the finite differencing is the application of the Black-Scholes Partial Differential Equation (PDE) framework (involving functions and their partial derivatives) whose price Finite differences in options pricing is a function of Finite differences in options pricing, with as the risk-free rate, as the time to maturity, and as the volatility of the underlying security: ...

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