Exact Forward and Put-Call Parity with TR-BDF2
7 Pages Posted: 4 Dec 2013 Last revised: 13 Jan 2014
Date Written: January 2014
We look at how to reproduce nearly exact bond and forward contract prices with the TR-BDF2 finite difference method applied to the Black-Scholes partial differential equation, with a term structure of interest rates or a term structure of dividends yields. We also show that a careful discretion preserves the put-call parity relationship.
Keywords: Finite difference, TR-BDF2, Calibration
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