Truncation Error for a Finite Difference Scheme for the Black-Scholes Model

Authors

Presenter(s)

Lawrence M. Kondowe

Files

Description

Finite difference methods are simplest and oldest methods among all the numerical techniques to approximate the solution of partial differential equations (PDEs). The derivatives in the partial differential equation are approximated by finite difference formulas. The error between the numerical solution and the exact solution is determined by the error between a differential operator to a difference operator. This error is called the discretization error or truncation error. The term truncation error reflects the fact that a finite part of a Taylor series is used in the approximation. In this work we will analyze the truncation error for a finite difference scheme for the Black Scholes PDE for the valuation of an option.

Publication Date

4-9-2014

Project Designation

Independent Research

Primary Advisor

Muhammad Usman

Primary Advisor's Department

Mathematics

Keywords

Stander Symposium project

Disciplines

Arts and Humanities | Business | Education | Engineering | Life Sciences | Medicine and Health Sciences | Physical Sciences and Mathematics | Social and Behavioral Sciences

Recommended Citation

"Truncation Error for a Finite Difference Scheme for the Black-Scholes Model" (2014). Stander Symposium Projects. 540.
https://ecommons.udayton.edu/stander_posters/540