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All All: If End

1. The document describes using three different numerical methods - explicit, leap frog, and Du Fort-Frankel - to solve a partial differential equation modeling the price of a European option. 2. The explicit method uses nested for loops to calculate the option price C_m at each time step moving backwards in time. 3. The leap frog method also uses nested for loops but calculates C_m at each alternate time step to improve stability. 4. The Du Fort-Frankel method explicitly calculates C_m at each time step as a function of neighboring values, avoiding instability issues.

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21 views3 pages

All All: If End

1. The document describes using three different numerical methods - explicit, leap frog, and Du Fort-Frankel - to solve a partial differential equation modeling the price of a European option. 2. The explicit method uses nested for loops to calculate the option price C_m at each time step moving backwards in time. 3. The leap frog method also uses nested for loops but calculates C_m at each alternate time step to improve stability. 4. The Du Fort-Frankel method explicitly calculates C_m at each time step as a function of neighboring values, avoiding instability issues.

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pv007rocks
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Clear all

clear all
vals=[100:-2:0];
dt=(5/1200);
time=[0:dt:(5/12)];
C_m=nan(length(vals),length(time));
max=max(vals);
trial =(.4^2*max^2*dt)/(2^2)
if (trial>1)
disp('change the step size or max')
end
C_m(:,length(time))=max(vals-50*ones(1,length(vals)),0);
C_m(1,:)=(100-50*exp(-.1*((5/12)-time)));
C_m(length(vals),:)=0;
l=length(time)
for i=length(time)-1:-1:1
for j=2:(length(vals)-1)
C_m(j,i)=C_m(j,i+1) + dt*(.5*((.4*vals(j))/2)^2* (C_m(j+1,i+1)+C_m(j1,i+1)-2*C_m(j,i+1)) + .5*.1*(vals(j)/2) * (-C_m(j+1,i+1)+ C_m(j-1,i+1)) .1*C_m(j,i+1));
end
end
C_m
St_Pr = nan(length(time),length(time));
St_Pr(1,1) = 50;
for t = 2:length(time)
St_Pr(1:t-1,t) = St_Pr(1:t-1,t-1)*exp((0.1-0.5*(0.4^2))*dt +
(0.4*sqrt(dt)));
St_Pr(t,t) = St_Pr(t-1,t-1)*exp((0.1-0.5*(0.4^2))*dt - (0.4*sqrt(dt)));
end
Euro_C = nan(length(time),length(time));
Euro_C(:,end) = max(St_Pr(:,end)- 50 , 0 );
for t = (length(time)-1):-1:1
Euro_C(1:t,t) = exp(-(.1)*Delta)*(.5* Euro_C(1:t,t+1) + .5*
Euro_C(2:t+1,t+1));
end
Euro_C(1,1)

Ans = 6.1171

Leap Frog Method


clear all
vals=[100:-2:0];
dt=(5/1200);
time=[0:dt:5/12];
C_m(:,length(time))=max(vals-50*ones(1,length(vals)),0);
C_m(1,:)=(100-50*exp(-.1*((5/12)-time)));
C_m(length(vals),:)=0;
l=length(time)
for j=2:(length(vals)-1)
C_m(j,l-1)=C_m(j,l) + dt*(.5*((.4*vals(j))/2)^2* (C_m(j+1,l)+C_m(j-1,l)2*C_m(j,l)) +.5*.1 * (vals(j)/2) * (-C_m(j+1,l)+C_m(j-1,l)) - .1 * C_m(j,l));
end
for i=(length(time)-2):-1:1
for j=2:(length(vals)-1)
C_m(j,i)=C_m(j,i+2) + 2*dt*(.5*((.4*vals(j))/2)^2* (C_m(j+1,i+1)+C_m(j1,i+1)-2*C_m(j,i+1))+.5*.1* (vals(j)/2) * (-C_m(j+1,i+1)+C_m(j-1,i+1)) - .1 *
C_m(j,i+1));
end
end
C_m

Du Fort Frankel Method


clear all
vals=[100:-2:0];
dt=(5/1200);
time=[0:dt:5/12];
C_m(:,length(time))=max(vals-50*ones(1,length(vals)),0);
C_m(1,:)=(100-50*exp(-.1*((5/12)-time)));
C_m(length(vals),:)=0;
l=length(time)
for j=2:(length(vals)-1)
C_m(j,l-1)=C_m(j,l) + dt*(.5*((.4*vals(j))/2)^2* (C_m(j+1,l)+C_m(j-1,l)2*C_m(j,l)) +.5*.1 * (vals(j)/2) * (-C_m(j+1,l)+C_m(j-1,l)) - .1 * C_m(j,l));
end
for i=(length(time)-2):-1:1
for j=2:(length(vals)-1)
C_m(j,i)=(C_m(j,i+2)+power((.4*vals(j))/2,2)*dt*(C_m(j+1,i+1)C_m(j,i+2)+C_m(j-1,i+1))+vals(j)*.1*(dt/2)*(-C_m(j+1,i+1)...
+C_m(j-1,i+1))-2*dt*.1*C_m(j,i+1))/(1+dt*power((.4*vals(j))/2,2));
end
end
C_m

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