Posted by
John Maiden on
May 10, 2011; 3:24am
URL: http://quantlib.414.s1.nabble.com/FDM-Framework-and-Convertible-Bond-tp32.html
I am interested in trying to adapt the convertible bond model by
Ayache, Forsyth, and Vetzal (The Valuation of Convertible Bonds
with Credit Risk) into the FDM framework, but I'm not sure how to
do it. Specifically, I'm looking at using the PDE in eqn 4.6
from their paper. My problem is incorporating the final term,
which depends on a function of the stock price.
In terms of the FDM framework, there are three functions I
need to define - drift, diffusion, and evolve. Drift and
diffusion I can see from the PDE. Would I add this final
term in the evolve function? In general, how could I
incorporate a PDE that has a f(S) term, where f is
non-linear?
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