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Finite Elements and Streamline Diffusion for the Pricing of Structured Financial Instruments |
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Written by Andreas Binder, Andrea Schatz
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21 September 2004 |
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The numerical treatment of partial differential equations in computational finance started with binomial and trinomial trees, with all the drawbacks related to these approaches. In the meanwhile (see, e.g., Duffy 2004, in the July issue of this magazine), finite differences are widely used in modern derivatives pricing. We present how pricing software can be developed on the basis of finite element techniques, which allow more flexibility than finite differences.
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