Derivative Securities and Difference Methods

In the past three decades, great progress has been made in the theory and prac­ tice of financial derivative securities. Now huge volumes of financial derivative securities are traded on the market every day. This causes a big demand for experts who know how to price financial derivative securities. This book is designed as a textbook for graduate students in a mathematical finance pro­ gram and as a reference book for the people who already work in this field. We hope that a person who has studied this book and who knows how to write codes for engineering computation can handle the business of providing efficient derivative-pricing codes. In order for this book to be used by various people, the prerequisites to study the majority of this book are multivariable calculus, linear algebra, and basic probability and statistics. In this book, the determination of the prices of financial derivative secu­ rities is reduced to solving partial differential equation problems, i. e. , a PDE approach is adopted in order to find the price of a derivative security. This book is divided into two parts. In the first part, we discuss how to establish the corresponding partial differential equations and find the final and nec­ essary boundary conditions for a specific derivative product. If possible, we derive its explicit solution and describe some properties of the solution. In many cases, no explicit solution has been found so far.