Chapter 5 Finite Difference Methods

Math6911 S08, HM Zhu

References

1. Chapters 5 and 9, Brandimarte 2. Section 17.8, Hull 3. Chapter 7, Numerical analysis, Burden and Faires

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Outline

Finite difference (FD) approximation to the derivatives Explicit FD method Numerical issues Implicit FD method Crank-Nicolson method Dealing with American options Further comments

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Chapter 5 Finite Difference Methods

5.1 Finite difference approximations

Math6911 S08, HM Zhu

Finite-difference mesh
Aim to approximate the values of the continuous function f(t, S) on a set of discrete points in (t, S) plane Divide the S-axis into equally spaced nodes at distance S apart, and, the t-axis into equally spaced nodes a distance t apart (t, S) plane becomes a mesh with mesh points on (i t, jS) We are interested in the values of f(t, S) at mesh points (i t, jS), denoted as

fi , j = f ( it, j S )

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The mesh for finite-difference approximation

fi , j = f ( it, j S )
Smax=MS S

?
j S

i t
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T=N t

t
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Black-Scholes Equation for a European option with value V(S,t)

V 1 2 2 2V V + S + rS rV = 0 2 S t 2 S where 0 < S < + and 0 t < T with proper final and boundary conditions
Notes: This is a second-order hyperbolic, elliptic, or parabolic, forward or backward partial differential equation Its solution is sufficiently well behaved ,i.e. well-posed
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(5.1)

Finite difference approximations

The basic idea of FDM is to replace the partial derivatives by approximations obtained by Taylor expansions near the point of interests
For example, f ( S,t ) t t t for small t, using Taylor expansion at point ( S ,t )
t 0

= lim

f ( S ,t + t ) f ( S ,t )

f ( S ,t + t ) f ( S ,t )

f ( S ,t + t ) = f ( S ,t ) +
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f ( S ,t ) t

t + O ( t )

)
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Forward-, Backward-, and Centraldifference approximation to 1st order derivatives

central backward forward

t t
Forward: Backward: Central: f ( t,S ) t f ( t,S )

t + t
+ O ( t ) + O ( t ) + O ( t )

f ( t + t,S ) f ( t,S )

t f ( t,S ) f ( t t,S )

t f ( t,S ) t

t f ( t + t,S ) f ( t t,S ) 2t

Symmetric Central-difference approximations to 2nd order derivatives

2 f ( t,S ) S
2

f ( t,S + S ) 2 f ( t,S ) + f ( t,S S )

( S )

+ O ( S )

Use Taylor's expansions for f ( t,S + S ) and f ( t,S S ) around point ( t,S ) : f ( t,S + S ) = ? + f ( t,S S ) = ?
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Finite difference approximations

fi +1, j fi , j f Forward Difference: , t t fi , j fi 1, j f Backward Difference: , t t fi +1, j fi 1, j f Central Difference: , t 2t As to the second derivative, we have: fi , j +1 fi , j f S S fi , j fi , j 1 f S S fi , j +1 fi , j 1 f S 2S

2 f fi , j +1 fi , j fi , j fi , j 1 S 2 S S S fi , j +1 2 fi , j + fi , j 1 = 2 S ( )
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Finite difference approximations

Depending on which combination of schemes we use in discretizing the equation, we will have explicit, implicit, or Crank-Nicolson methods We also need to discretize the boundary and final conditions accordingly. For example, for European Call,
Final Condition: f N , j = max ( j S K , 0 ) , for j = 0 ,1,...,M Boundary Conditions: fi ,0 = 0 , for i = 0 ,1,...,N r ( N i ) t fi ,M = S max Ke where Smax = M S.

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Chapter 5 Finite Difference Methods

5.2.1 Explicit Finite-Difference Method

Math6911 S08, HM Zhu

Explicit Finite Difference Methods

f f 1 2 22f In + rS + S = rf , at point (i t , j S ), set 2 t S 2 S f i , j f i 1 , j f backward difference: t t f i , j +1 f i , j 1 f central difference: , S 2S and f i , j + 1 + f i , j 1 2 f i , j 2f , r f = rf i , j , S = j S 2 2 S S
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Explicit Finite Difference Methods

Rewriting the equation, we get an explicit schem e: f i 1 , j = a *j f i , j 1 + b*j f i , j + c*j f i , j +1 where 1 a = t 2 j 2 rj 2 2 2 * b j = 1 t j + r
* j

(5.2)

c =
* j
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( ( 1 t ( 2

) ) + rj )

for i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 .

Numerical Computation Dependency

S Smax=MS
(j+1)S j S (j-1)S
x x x x

0
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(i-1)t it

T=N t

Implementation
1. Starting with the final values f N , j , we apply (5.2) to solve f N 1, j for 1 j M 1. We use the boundary condition to determine f N 1,0 and f N -1,M . 2. Repeat the process to determine f N 2 , j and so on

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Example
We compare explicit finite difference solution for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8446 EFD Method with Smax=$100, S=2, t=5/1200: $2.8288 EFD Method with Smax=$100, S=1, t=5/4800: $2.8406

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Example (Stability)
We compare explicit finite difference solution for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8446

EFD Method with Smax=$100, S=2, t=5/1200: $2.8288 EFD Method with Smax=$100, S=1.5, t=5/1200: $3.1414 EFD Method with Smax=$100, S=1, t=5/1200: -$2.8271E22

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Chapter 5 Finite Difference Methods

5.2.2 Numerical Stability

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Numerical Accuracy
The problem itself The discretization scheme used The numerical algorithm used

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Conditioning Issue

Suppose we have mathematically posed problem: y = f ( x) where y is to evaluated given an input x. Let x* = x + x for small change x. If hen f x* is near f ( x ) , then we call the problem is well - conditioned . Otherwise, it is ill-posed/ill-conditioned.

( )

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Conditioning Issue
Conditioning issue is related to the problem itself, not to the specific numerical algorithm; Stability issue is related to the numerical algorithm One can not expect a good numerical algorithm to solve an illconditioned problem any more accurately than the data warrant But a bad numerical algorithm can produce poor solutions even to well-conditioned problems

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Conditional Issue

The concept "near" can be measured by further information about the particular problem: f ( x ) f x* f ( x)

( )

x
x

( f ( x ) 0)

where C is called condition number of this problem. If C is large, the problem is ill-conditioned.

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Floating Point Number & Error

Let x be any real number. Truncated floating point number : x fl ( x ) = .x1 x2 where x1 0, 0 xi 9, d : an integer, precision of the floating point system Floating point or roundoff error : fl ( x ) x
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Infinite decimal expansion : x = .x1 x2

xd

10 e xd 10 e

e : an bounded integer

Error Propagation
When additional calculations are done, there is an accumulation of these floating point errors. Example : Let x = 0.6667 and fl ( x ) = 0.667 10 0 where d = 3. Floating point error : fl ( x ) x = 0.0003 Error propagatio n : fl ( x ) x = 0.00040011
2 2
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Numerical Stability or Instability

Stability ensures if the error between the numerical soltuion and the exact solution remains bounded as numerical computation progresses. That is, f x* (the solution of a slightly perturbed problem) is near f * ( x )( the computed solution) . Stability concerns about the behavior of fi , j f ( it, jS ) as numerical computation progresses for fixed discretization steps t and S. 27
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( )

Convergence issue
Convergence of the numerical algorithm concerns about the behavior of fi , j f ( it, jS ) as t, S 0 for fixed values ( it, jS ) . For well-posed linear initial value problem, Stability Convergence (Lax's equivalence theorem, Richtmyer and Morton, "Difference Methods for Initial Value Problems" (2nd) 1967)
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Numerical Accuracy
These factors contribute the accuracy of a numerical solution. We can find a good estimate if our problem is wellconditioned and the algorithm is stable
Stable: f * ( x ) f x* ( ) f ( x) f ( x) Well-conditioned: f ( x ) f ( x )
* *

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Chapter 5 Finite Difference Methods

5.2.3 Financial Interpretation of Numerical Instability

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Financial Interpretation of instability (Hall, page 423-4)

If f S and 2 f S 2 are assum ed to be the sam e at ( i + 1, j ) as they are at ( i, j ), we obtain equations of the form : f f f f =a +b +c (5.3)
i,j j i +1 , j 1 j i +1 , j j i +1 , j +1

where 1 1 1 1 2 2 d t j t r j = 1 + r t 2 2 1 + r t 1 1 2 2 bj = 0 1 j t = 1 + r t 1 + r t 1 1 1 1 2 2 j = u c t j + t r j = 2 1 + r t 2 1 + r t for i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 . Math6911, S08, HM ZHU j= a

Explicit Finite Difference Methods

u 0

i +1, j +1 i +1, j

i , j
d

i +1, j 1

These coefficients can be interpreted as probabilities times a discount factor. If one of these probability < 0, instability occurs.
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Explicit Finite Difference Method as Trinomial Tree

Check if the mean and variance of the Expected value of the increase in asset price during t: E [ ] = S d + 0 0 + S u = rjS t = rS t Variance of the increment:
2 2 2 2 2 2 E 0 S S = j S t = S t = + + ( ) ( ) ( ) d 0 u 2 2 2 2 2 2 2 2 2 2 = S t r S t S t Var [ ] = E E ( ) [ ] 2

which is coherent with geometric Brownian motion in a risk-neutral world

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Change of Variable

Define Z = ln S. The B-S equation becomes f 2 f 2 2 f +r + = rf 2 2 Z 2 Z t The corresponding difference equation is fi +1, j fi , j t or
* fi , j = *j f i +1, j 1 + * f + j i +1, j j f i +1, j +1

2 fi +1, j +1 f i +1, j 1 2 f i +1, j +1 2 fi +1, j 1 + fi +1, j +1 +r + = rfi , j 2 2 2 Z 2 Z (5.4)

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Change of Variable

where
2 2 1 t t * j = + r 1 + r t 2 2Z 2 Z 2 t 2 1 * 1 = j 2 1 + r t Z 2 2 1 t t * j = + r 2 1 + r t 2 2 Z 2 Z

It can be shown that it is numerically most efficient if Z = 3t .

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Reduced to Heat Equation

Get rid of the varying coefficients S and S by using change of variables: 1 1 ( k 1) x ( k +1)2 4 S = Ee x , t = T 2 2 , V (S , t ) = E e 2 u ( x, )
1 2 k =r 2 Equation (5.1) becomes heat equation (5.5):

u 2u = x2
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(5.5)
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for < x < + and > 0

Explicit Finite Difference Method

m With u n = u (n x,m ), this involves solving a system of

finite difference equations of the form :

m +1 m m m m 2 un un u u un + 2 +1 n n 1 + O ( ) = + O (x ) 2 (x )

Ignoring terms of O ( ) and O (x ) , we can approximat e

2

this by
m +1 m m m ( ) 1 2 un u u = un + + +1 n n 1

1 2 T + 2 where = , for and 0 1 -N n N m , ,...M = = (x )2 Math6911, S08, HM ZHU

Stability and Convergence (P. Wilmott, et al, Option Pricing)

Stability: The solution of Eqn (5.5) is

1 1 ; ii) Unstable if > i) Stable if 0 < = 2 2 ( x ) 2

Convergence: 1 If 0 < , then the explicit finite-difference approximation 2 converges to the exact solution as , x 0
m (in the sense that un u ( n x, m ) as , x 0)

Rate of Convergence is O ( )
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Chapter 5 Finite Difference Methods

5.3.1 Implicit Finite-Difference Method

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Implicit Finite Difference Methods

f f 1 2 22f In + rS + S = r f , we use 2 t S 2 S f i +1,j f i ,j f forw ard difference: t t f i , j + 1 f i , j 1 f central difference: , S 2S and f i , j + 1 + f i , j 1 2 f i , j 2f , rf = rf i , j 2 2 S S
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Implicit Finite Difference Methods

Rewriting the equation, we get an implicit scheme: a j f i,j 1 + b j f i,j + c j f i,j +1 = f i +1, j where 1 a j = t 2 j 2 + rj 2 2 2 b j = 1 + t j + r cj
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(5.6)

( 1 = t ( 2

) ) + rj )

for i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 .

Numerical Computation Dependency

S Smax=MS
(j+1)S j S (j-1)S
x x x x

0
Math6911, S08, HM ZHU

(i-1)t it (i+1)t

T=N t

Implementation
Equation (5.6) can be rewritten in matrix form: Cfi = fi +1 + bi

( 5.7 )
T

where fi and bi are (M 1) dimensional vectors fi = fi ,1 , fi ,2 , fi ,3 , fi ,M 1 ,b i = a1 fi ,0 ,0 , 0 , and C is (M 1) (M 1) symmetric matrices b1 a 2 C=0 0 c1 b2 a3 0 c2 b3 0 aM 1 0 0 cM 2 bM 1 , 0 , cM 1 fi ,M

T

Implementation
1. Starting with the final values f N , j , we need to solve a linear system (5.7) to obtain f N 1, j for 1 j M 1 using LU factorization or iterative methods. We use the boundary condition to determine f N 1,0 and f N -1,M . 2. Repeat the process to determine f N 2 , j and so on

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Example
We compare implicit finite difference solution for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8446 IFD Method with Smax=$100, S=2, t=5/1200: $2.8194 IFD Method with Smax=$100, S=1, t=5/4800: $2.8383

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Example (Stability)
We compare implicit finite difference solution for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8846

IFD Method with Smax=$100, S=2, t=5/1200: $2.8288 IFD Method with Smax=$100, S=1.5, t=5/1200: $3.1325 IFD Method with Smax=$100, S=1, t=5/1200: $2.8348

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Implicit vs Explicit Finite Difference Methods

i +1, j +1 i , j i +1, j i +1, j 1

Explicit Method
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i , j +1 i , j i , j 1
Implicit Method (always stable)

i +1, j

Implicit vs Explicit Finite Difference Method

The explicit finite difference method is equivalent to the trinomial tree approach: Truncation error: O(t) Stability: not always The implicit finite difference method is equivalent to a multinomial tree approach: Truncation error: O(t) Stability: always
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Other Points on Finite Difference Methods

It is better to have ln S rather than S as the underlying variable in general Improvements over the basic implicit and explicit methods: Crank-Nicolson method, average of explicit and implicit FD methods, trying to achieve
Truncation error: O((t)2 ) Stability: always
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Chapter 5 Finite Difference Methods

5.3.2 Solving a linear system using direct methods

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Solve Ax=b

A x=b Various shapes of matrix A

Lower triangular

Upper triangular

General
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5.3.2.A Triangular Solvers

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Example: 3 x 3 upper triangular system

4 6 1 x1 100 0 1 1 x = 10 2 20 x3 0 0 4
x3 = 20 / 4 = 5 x2 = 10 x3 = 5 4 x1 = 100 x3 6 * x2 = 65 x1 = 65 4
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Solve an upper triangular system Ax=b

(0

0 aii

x1 x2 ain ) = aii xi + aij x j = bi ,i = 1, , n j >i x n

xn = bn ann aii ,i = 1, xi = b a x i ij j > j i

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n 1
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Implementation

Function x = UpperTriSolve(A, b) n = length(b); x(n) = b(n)/A(n,n); for i = n-1:-1:1 sum = b(i); for j = i+1:n sum = sum - A(i,j)*x(j); end x(i) = sum/A(i,i); end
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5.3.2.B Gauss Elimination

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To solve Ax=b for general form A

To solve Ax = b : Suppose A = LU. Then Ax = LUx = b z

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Solve two triangular systems : 1) solve z from Lz = b 2) solve x from Ux = z

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Gauss Elimination

Goal: Make A an upper triangular matrix through using fundamental row operations For example, to zero the elements in the lower triangular part of A 1) Zero a21
1 a 21 a11 0 0 0 a11 1 0a21 a 0 1 31 a12 a22 a32 a13 a11 a23 = 0 a33 a31 a12 a21 a12 a22 a11 a32 a13 a21 a13 a23 a11 a33
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E 21 A

Gauss Elimination

2) Zero a31
1 0 a31 a11 a11 0 0 1 0 0 0 1 a31 a12 a22 a21 a12 a11 a11 a13 a a 12 13 a21 a13 a21 a13 a21 a12 a23 a23 = 0 a22 a11 a11 a11 a33 a31 a12 a31 a13 a33 0 a32 a11 a11 a11 a12 a13 = 0 a a 22 23 0 a32 a33
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a32

E 31 E 21 A
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Gauss Elimination

3) Zero a32
1 0 1 0 0 a32 a22 0 a11 0 0 0 1 a12 a22 a32 a13 a11 a23 = 0 a33 0 a12 a22 0 a13 a23 U a32 a23 a33 a22

E 32 E 31 E 21 A = U lower triangular
Math6911, S08, HM ZHU

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Gauss Elimination
= 0 0 1

Claim 1:
E 32 E 31 E 21

1 a 21 a1 1 a 31 a1 1

0 1 a 32 a 22

Claim 2:

( E 32 E 31 E 21 )
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1 a 21 = a11 a 31 a11

0 1 a 32 a 22

0 0 1

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LU Factorization

Therefore, through Gauss Elimination, we have

E 32 E 31 E 21A = U A = (E 32 E 31 E 21 ) U
1

A = LU

It is called LU factorization. When A is symmetric,

A = LLT which is called Cholesky Decomposition

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To solve Ax=b for general form A

To solve Ax = b becomes 1) Use Gauss elimination to make A upper triangular, i.e. L1Ax = L1b Ux = z 2) Solve x from Ux = z This suggests that when doing Gauss elimination, we can do it to the augmented matrix [A b] associated with the linear system.

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An exercise

% build the matrix A A = [2, -1, 0; -1, 2, -1; 0, -1, 2]

2 1 x1 0 1 2 1 x = 0 2 1 2 x 3 4

% build the vector b x_true = [1:3]'; b = A * x_true; % lu decomposition of A [l, u] = lu(A) % solve z from lz = b where z = ux z = l\b; % solve x from ux = z x = u\z

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General Gauss Elimination

row i

row j -

a ji aii

row i

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What if we have zero or very small diagonal elements?

Somtimes, we need to permute rows of A so that Gauss eliminatio n can be computed or computed stably, i.e., PA = LU. This is called partial pivoting. For example 1 3 0 1 0 1 2 3 PA = = 1 0 2 3 0 1 1 0 0.0001 0.0001 1 1 = = LU A= - 9999 1 10,000 1 0 1 0 1 1 0 1 0.0001 1 1 = = LU PA = 1 1 0.0001 1 0 .9999 Math6911, S08, HM ZHU 0 1 0 A= 2

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Can we always have A = LU?

No! If det ( A (1:k,1:k ) ) 0 for k =1,...,n-1, then A Rnxn has an LU factorization. Proof: See Golub and Loan, Matrix Computation, 3rd edition

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Chapter 5 Finite Difference Methods

5.4.1 Crank-Nicolson Method

Math6911 S08, HM Zhu

Explicit Finite Difference Methods

f f 1 2 22f + rS + S = rf , W ith 2 t S 2 S we can obtain an explicite form : f i +1 , j f i , j t rj S + O ( t ) = 2S 1 2 2 2 f i + 1 , j + 1 + f i + 1 , j 1 2 f i + 1 , j j ( S ) S2 2

f i +1 , j +1 f i +1 , j 1

+ rf i +1 , j + O
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(( S ) )
2

Implicit Finite Difference Methods

f f 1 2 22f + rS + S = r f, W ith 2 t S 2 S we can obtain an im plicit form : f i +1 , j f i , j t rj S + O ( t ) = 2S 1 2 2 2 f i , j + 1 + f i , j 1 2 f i , j j ( S ) S2 2

f i , j +1 f i , j 1

+ rf i , j + O
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(( S ) )
2

Crank-Nicolson Methods: average of explicit and implicit methods (Brandmarte, p485)

fi+1, j fi, j

t rjS fi+1, j +1 fi+1, j 1 fi, j +1 fi, j 1 + 2 2S 2S fi, j +1 + fi, j 1 2 fi, j 1 2 2 2 fi +1, j +1 + fi +1, j 1 2 fi +1, j j ( S ) + 2 2 S S 4 r 2 + ( fi+1, j + fi, j ) + O ( S ) 2
Math6911, S08, HM ZHU

+ O ( t ) =
2

Crank-Nicolson Methods
R e w ritin g th e e q u a tio n , w e g e t a n C ra n k -N ic o ls o n s c h e m e : j f i , j 1 + 1

j f i + 1 , j 1
w h e re

( )f + (1 + ) f
j j

i,j

j f i , j +1 = + j f i +1 , j +1 (5 .5 )

i +1 , j

t 2 j 2 rj 4 t 2 j2 + r j = 2 t j= 2 j 2 + rj 4 fo r i = N - 1 , N - 2 , ..., 1 , 0 a n d j = 1 , 2 , ..., M - 1 .

j=

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Numerical Computation Dependency

S Smax=MS
(j+1)S j S (j-1)S
x x x x x x

0
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(i-1)t it (i+1)t

T=N t

Implementation
Equation (5.5) can be rewritten in matrix form: M1fi = M 2fi +1 + b where fi and bi are (M 1) dimensional vectors fi = fi ,1 , fi ,2 , fi ,3 , fi ,M 1 , , M 1 ( fi ,M + f i +1,M ) 0 M 2 1 M 1 0 0
T T

b= 1 ( fi ,0 + fi +1,0 ) , 0 1 1 1 1 2 2 M1 = 0 3 0

and M1 and M 2 are (M 1) (M 1) symmetric matrices

M 1

Implementation

and 0 0 1 1 + 1 1 0 + 2 2 2 M2 = 0 3 M 2 0 M 1 1 + M 1 0

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Example
We compare Crank-Nicolson Methods for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8446 CN Method with Smax=$100, S=2, t=5/1200: $2.8241 CN Method with Smax=$100, S=1, t=5/4800: $2.8395

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Math6911, S08, HM ZHU

Example (Stability)
We compare Crank-Nicolson Method for a European put with the exact Black-Scholes formula, where T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%. Black-Scholes Price: $2.8446 CN Method with Smax=$100, S=1.5, t=5/1200: $3.1370 CN Method with Smax=$100, S=1, t=5/1200: $2.8395

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Example: Barrier Options

Barrier options are options where the payoff depends on whether the underlying assets price reaches a certain level during a certain period of time.
Types: knock-out: option ceases to exist when the asset price reaches a barrier Knock-in: option comes into existence when the asset price reaches a barrier

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Example: Barrier Option

We compare Crank-Nicolson Method for a European downand-out put, where T = 5/12 yr, S0=$50, K = $50, Sb=$50 =40%, r = 10%. What are the boundary conditions for S?

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Example: Barrier Option

We compare Crank-Nicolson Method for a European downand-out put, where T = 5/12 yr, S0=$50, K = $50, Sb=$50 =40%, r = 10%. Boundary conditions are

f ( t,S max ) = 0 and f ( t,Sb ) = 0

Exact Price (Hall, p533-535): $0.5424 CN Method with Smax=$100, S=0.5, t=1/1200: $0.5414

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Appendix A.

Matrix Norms

Math6911 S08, HM Zhu

Vector Norms
- Norms serve as a way to measure the length of a vector or a matrix - A vector norm is a function mapping x n to a real number x s.t. x > 0 for any x 0; x = 0 iff x = 0 c x = c x for any c x + y x + y for any x, y n - There are various ways to define a norm x x
p

p xi i =1 max xi
n 1 i n

(p = 2 is the Euclidean norm )

= ?, v 2 = ?

Math6911, S08, HM ZHU

For example, v = [2 4 - 1 3]. v 1 = ?, v

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Matrix Norms
- Similarly, a matrix norm is a function mapping A mn to a real number A s.t. A > 0 for any A 0; A = 0 iff A = 0 c A = c A for any c A + B A + B for any A, B mn - Various commonly used matrix norms A
p

sup
x0

Ax x
m p

A A

aij i =1 j =1
m n

A 1 max

1 j n i =1

ij

max
1 i m

a
j =1

ij

A 2 A T A , the spectral norm, where

(B ) max{k : k is an eigenvalue of B}

An Example

2 4 1 A= 3 1 5 2 3 1 A =? A 2 =? A
F

A1 =?
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=?
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Basic Properties of Norms

Let A, B

nn

and x, y . Then
n

1. x 0; and x = 0 x = 0 2. x + y x + y 3. x = x where is a real number 4. Ax A x 5. AB A B

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Condition number of a square matrix

All norms in n mn are equivalent. That is, if and are norms on n , then c1 ,c2 > 0 such that for all x n , we have c1 x x

c2 x

Condition Number of A Matrix: C A A1 , where A nn . The condition number gives a measure of how close a matrix is close to singular. The bigger the C, the harder it is to solve Ax = b.
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Convergence

- vectors x k converges to x x k x converges to 0 - matrix A k 0 A k 0 0

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Appendix B.

Basic Row Operations

Math6911 S08, HM Zhu

Basic row operations

Three kinds of basic row operations: 1) Interchange the order of two rows or (equations)
0 1 0a11 1 0 0a21 0 0 1 a31 a12 a22 a32 a13 a21 a22 a23 = a11 a12 a33 a31 a32 a23 a13 a33

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Basic row operations

2) Multiply a row by a nonzero constant

c 0 0a11 a12 0 1 0a21 a22 0 0 1 a31 a32 a13 ca11 ca12 a23 = a21 a22 a33 a31 a32 ca13 a23 a33

3) Add or subtract rows 1 0 0 a11 a12 a13 a11 a12 1 1 0 a a a a22 a12 22 23 = a21 a11 21 a32 0 0 1 a31 a32 a33 a31
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a13 a23 a13 a33

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