Taylor series

From WilmottWiki

Jump to: navigation, search

Taylor series is a way of expressing a function as a power series in increasing integer powers of the independent variable about some point.

The Taylor series representation of f(x+\delta x) about the point x is the infinite sum

f(x+\delta x)=f(x)+\sum_{i=1}^{\infty}\frac{1}{i!} \delta x^i \frac{d^if}{dx^i}(x).

The most common application of this in quantitative finance is to approximate the value of an option in terms of the greeks.

When the independent variable is stochastic we can use Ito's lemma to relate the stochastic differential equations for the dependent and independent variables.

Retrieved from "http://www.wilmottwiki.com/wiki/index.php/Taylor_series"
Personal tools

Certificate in Quantitative Finance - Sponsors of Wilmott Wiki