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Binomial trees as the number of time steps is increased (or equivalently as the time step tends to 0), converge to the exact value for an option. So why do people use FDM for pricing options (for example an American Put), if Binomial Trees give already accurate results and converges quickly?

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    $\begingroup$ The size of the binomial tree also doubles with each additionnal step. $\endgroup$ – Lliane Feb 27 at 9:06
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    $\begingroup$ Not if using a recombining tree (CRR model) $\endgroup$ – Antoine Conze Feb 27 at 17:33
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Actually recombining binomial trees are only a particular case of an explicit FDM scheme. But they have obvious limitations, the foremost being that they cannot accomodate local volatilities. Also 1/2 explicit 1/2 implicit FDM schemes (Crank-Nicolson) have faster convergence with respect to the size of the time step. And FDM schemes can accomodate all sorts of boundary conditions including Dirichlet which is necessary to accurately price barrier options.

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