Mastering Python for Finance - Second Edition

The explicit method

The explicit method for approximating f_i,j is given by the following equation:

Here, we can see that the first difference is the backward difference with respect to t, the second difference is the central difference with respect to S, and the third difference is the second-order difference with respect to S. When we rearrange the terms, we get the following equation:

Where:

Then:

The iterative approach of the ...