AdvancedMultiple choice
Why is the Crank–Nicolson scheme popular for pricing with the Black–Scholes PDE, and what is its known weakness?
- AIt is explicit and so cheap per step, but it needs very small time steps to remain stable
- BIt is first-order accurate in time but can never oscillate, whatever the payoff
- CSecond order in time and unconditionally stable, but it can oscillate near kinks
- DIt avoids discretising the stock price, which makes it exact for European options
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