medium · Quantitative Finance
In the context of the Feynman-Kac formula, what is the significance of the 'Initial Value Problem' versus a 'Terminal Value Problem'?
- Initial value problems are used for Monte Carlo, while terminal value problems are for PDEs.
- Expectations can only be computed forward in time from t=0.
- Finance usually solves terminal value problems, where the payoff is known at T and we solve backward to t.
- Feynman-Kac only works for initial value problems.
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