Numerical Analysis Questions
The concept of the finite difference method for option pricing involves approximating the continuous partial differential equation (PDE) that describes the option pricing problem with a discrete difference equation. This method divides the time and price domains into a grid and approximates the derivatives in the PDE using finite difference approximations. By solving the resulting system of difference equations iteratively, the option price at each grid point can be determined. The finite difference method is widely used in numerical analysis for option pricing as it provides a computationally efficient approach to solving complex option pricing problems.