Chapter IV - Numerical & Simulation Techniques in...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Numerical & Simulation Techniques in Finance FRE 6251 Chapter IV – Interpolation, etc. Edward D. Weinberger, Ph.D, F.R.M. Adjunct Assoc. Professor Polytechnic University edw@panix.com
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
OUTLINE Chapter IV – Interpolation, etc. Statement of Problem Relevance to finance Building yield curves Building volatility curves Tools Neville’s algorithm Splines Rational Interpolation
Background image of page 2
THE PROBLEM Find a “reasonable” curve that passes through the given series of points ( x 1 , y 1 ), ( x 2 , y 2 ), …, ( x N , y N ), where “reasonable” might mean (for example) passes through all points (or not) smooth (or not) easy to compute
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
WHAT NOT TO DO Want to interpolate (1, 0), (2, 0), (3, 0), (4, 0), (5, 0). Try a quintic polynomial, e.g. P ( x ) = ( x 1)( x – 2)( x – 3)( x – 4)( x – 5)
Background image of page 4
RELEVANCE TO FINANCE ALL pricing formulas are a kind of interpolation, since they are attempts to base pricing of a particular instrument on benchmark prices.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 17

Chapter IV - Numerical & Simulation Techniques in...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online