Numerical Analysis Questions
The concept of finite element method for option pricing involves using numerical techniques to solve partial differential equations (PDEs) that describe the behavior of financial options. In this method, the option pricing problem is divided into smaller subdomains or elements, and the PDEs are approximated by a set of algebraic equations. These equations are then solved iteratively to obtain the option prices at different points in time and space. The finite element method allows for more accurate and efficient pricing of options compared to traditional analytical methods, especially for complex option structures or when the underlying asset follows a stochastic process.