Explain finite-difference method in finance
Explain finite-difference method in finance.
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Financial problems starting from stochastic differential equations as models for quantities developing randomly, like equity prices or interest rates, are using the language of calculus. We refer, in calculus to gradients, slopes, rates of change and sensitivities. Such mathematical ‘derivatives’ explain how fast a dependent variable, changes as one of the independent variables, as an option value, as an equity price and changes. These sensitivities are technically explained as the ratio of the infinitesimal change in the dependent variable to the infinitesimal change into the independent.
And we need an infinite number of such infinitesimals to explain an entire curve. Nonetheless, when trying to compute these slopes numerically, on a computer, for illustration, we cannot deal along with infinites and infinitesimals, and have to resort to estimates.
Explain why we measure a project’s risk as the change in the CV.
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Elaborate the statement: Coefficient of variation is a better risk calculator to use than the standard deviation when estimating the risk of capital budgeting projects.
Explain the terms: diversifiable and non-diversifiable risk. Which one is more important to financial managers in business firms?
What is mathematical definition of risk in form of semi-variance?
What are the pros and cons of commercial paper relative to bank loans for a company seeking short-term financing?
Give an example of closed form solution?
How is gamma measure the rehedged position?
Explain the term Serial Autocorrelation.
Why is Vomma/Volga measures convexity?
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