What is the difference between pricing a closed form and finite difference method whilst pricing liquid CDS portfolio?
Can anyone share any articles which are not too mathematical intensive and can explain the differences?
Where's the bottleneck, exactly? your knowledge of FDM in general? What's CDS equation?What is the difference between pricing a closed form and finite difference method whilst pricing liquid CDS portfolio?
Can anyone share any articles which are not too mathematical intensive and can explain the differences?
The market for CDS on corporate credits in fact hit its peak liquidity around 2006, when it was very liquid, at least if compared to the underlying bonds. These days, there is minimal liquidity in single name CDS, but you can still move a billion dollar trade through the CDX IG market without leaving much of a footprint. The overall credit derivatives market is probably down something like 90% from the peak, and the fraction of the market made up of simple index trades is way up.To people here in general, and Cuculainn in particular, "finite difference method" triggers an immediate association with partial differential equations.
Indeed, this is standardised mathematical jargon. A la carte definitions abound in AI and physics.
Maybe OP means the calculus of finite differences? Feels like some kind of sensitivity analysis?
https://en.wikipedia.org/wiki/Finite_difference
FDM = calculus of finite differences applied to PDE.
BTW are CDSs liquid these days? In 2006 no one wanted them (except Paulson)??