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Topic: Basic questions regarding option pricing with FDM  (Read 824 times)

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« on: January 09, 2011, 09:21:03 PM »

When calculating the option prices with the use of finite difference methods you approximate the derivatives in the Black & Scholes PDE.
Where do you get the option prices used in these approximations? I mean, we are supposed to calculate the option price, and at the same time you need prices to do the approximations of the derivatives.
Also, what is x in the BS PDE du/dt = 1/2 * sigma^2 * d^u/dx^2?

Thanks in advance.

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