Consider the Black-Scholes PDE as as with terminal and boundary conditions: U(S,

Question

Consider the Black-Scholes PDE as as with terminal and boundary conditions: U(S, T) = max(S-K, 0). U(0,t) = 0, Let S-Ser 80 z = ln(S/So) and t = T-r. which transform (1) into with transformed terminal and boundary oonditions: Or we may write 2. B 2 r--?2, and C =-r where A- 2 Consider the FD scheme for (5) or (9) ti -ALU.tii-2U.?1+U (1-u) ?? i-1 (10) -write the scheme with w = 0.5, ? 0.5 What type of sches this? Explicit or Implicit? Find the truncation erION Cheek the stability Write a MATLAB code to solve this case numerically. Plot the solution. I

Explanation / Answer

The Black Scholes model, also known as the Black-Scholes-Merton model, is a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option.

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