ABSTRACT
Option pricing problems can typically be represented as a partial differential equation (PDE) subject to boundary conditions. The idea behind finite difference methods is to approximate the partial derivatives in the PDE by a difference quotient. This chapter serves as an introduction to finite difference methods and their Object–Oriented implementation. It focuses on the three most common one–dimensional schemes, explicit, implicit and Crank/Nicolson. The three finite difference schemes are implemented in a class hierachy, with the simplest scheme (the “explicit” scheme) forming the base class finite difference, from which implicit finite difference and Crank/Nicolson are derived.
