FDM Intro PDF

Chapter 5 Finite Difference
Methods
Math6911 S08, HM Zhu
References
1. Chapters 5 and 9, Brandimarte

2. Section 17.8, Hull
3. Chapter 7, Numerical analysis, Burden and Faires
2
Math6911, S08, HM ZHU
Outline
Finite difference (FD) approximation to the derivatives

Explicit FD method
Numerical issues
Implicit FD method
Crank-Nicolson method
Dealing with American options
Further comments
3

Methods
5.1 Finite difference approximations
Finite-difference mesh
Aim to approximate the values of the continuous function
f(t, S) on a set of discrete points in (t, S) plane
Divide the S-axis into equally spaced nodes at distance
S apart, and, the t-axis into equally spaced nodes a
distance t apart
(t, S) plane becomes a mesh with mesh points on
(i t, jS)
We are interested in the values of f(t, S) at mesh points
(i t, jS), denoted as
fi , j = f ( it, j S )
The mesh for finite-difference

approximation
fi , j = f ( it, j S )
S
Smax=MS
?
j S
i t
T=N t
t
6
Black-Scholes Equation for a

European option with value V(S,t)
V 1 2 2 2V
V
+ S
+ rS
rV = 0
2
S
t 2
S
where 0 < S < + and 0 t < T
(5.1)
with proper final and boundary conditions

Notes:
This is a second-order hyperbolic, elliptic, or parabolic,
forward or backward partial differential equation
Its solution is sufficiently well behaved ,i.e. well-posed
Finite difference approximations

The basic idea of FDM is to replace the partial derivatives
by approximations obtained by Taylor expansions near the
point of interests
For example,
f ( S,t )
= lim
f ( S ,t + t ) f ( S ,t )
f ( S ,t + t ) f ( S ,t )
t
t
t
for small t, using Taylor expansion at point ( S ,t )
t 0
f ( S ,t + t ) = f ( S ,t ) +
f ( S ,t )
t
t + O ( t )
)
8
Forward-, Backward-, and Centraldifference approximation to 1st order

derivatives
central
backward
forward
f ( t,S )
Forward:
Backward:
Central:
t
f ( t,S )
t
f ( t,S )
t
f ( t + t,S ) f ( t,S )
t + t
t t
+ O ( t )
t
f ( t,S ) f ( t t,S )
+ O ( t )
t
f ( t + t,S ) f ( t t,S )
2t
+ O ( t )
Symmetric Central-difference
approximations to 2nd order derivatives
2 f ( t,S )
S
f ( t,S + S ) 2 f ( t,S ) + f ( t,S S )
( S )
+ O ( S )
Use Taylor's expansions for f ( t,S + S ) and f ( t,S S )

around point ( t,S ) :
f ( t,S + S ) = ?
+
f ( t,S S ) = ?
10

fi +1, j fi , j
f
Forward Difference:
,
t
t
fi , j fi 1, j
f
Backward Difference:
,
t
t
fi +1, j fi 1, j
f
Central Difference:
,
t
2t
As to the second derivative, we have:
fi , j +1 fi , j
f
S
S
fi , j fi , j 1
f
S
S
fi , j +1 fi , j 1
f
S
2S
2 f fi , j +1 fi , j fi , j fi , j 1
S
2
S
S
S
fi , j +1 2 fi , j + fi , j 1
=
2
S
( )
11

Depending on which combination of schemes we use in
discretizing the equation, we will have explicit, implicit, or
Crank-Nicolson methods
We also need to discretize the boundary and final
conditions accordingly. For example, for European Call,
Final Condition:
f N , j = max ( j S K , 0 ) , for j = 0 ,1,...,M
Boundary Conditions:
fi ,0 = 0
, for i = 0 ,1,...,N
r ( N i ) t
fi ,M = S max Ke
where Smax = M S.
12

Methods
5.2.1 Explicit Finite-Difference Method
Explicit Finite Difference Methods

f
f
1 2 22f
In
+ rS
+ S
= rf , at point (i t , j S ), set
2
t
S 2
S
f i , j f i 1 , j
f
backward difference:
t
t
f i , j +1 f i , j 1
f
central difference:
,
S
2S
and
f i , j + 1 + f i , j 1 2 f i , j
2f
, r f = rf i , j , S = j S
2
2
S
S

Rewriting the equation, we get an explicit schem e:
f i 1 , j = a *j f i , j 1 + b*j f i , j + c*j f i , j +1
(5.2)
where
(
(
1
t (
2
)
)
+ rj )
1
a = t 2 j 2 rj
2
2 2
*
b j = 1 t j + r
*
j
c =
*
j
for i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 .

Numerical Computation Dependency
S
Smax=MS
x
(j+1)S
jS
(j-1)S
0
x
x
(i-1)t it
T=N t
Implementation
1. Starting with the final values f N , j , we apply (5.2) to solve
f N 1, j for 1 j M 1. We use the boundary condition
to determine f N 1,0 and f N -1,M .
2. Repeat the process to determine f N 2 , j and so on
17
Example
We compare explicit finite difference solution for a
European put with the exact Black-Scholes formula, where
T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%.
Black-Scholes Price: $2.8446
EFD Method with Smax=$100, S=2, t=5/1200: $2.8288
18
Example (Stability)
We compare explicit finite difference solution for a European
put with the exact Black-Scholes formula, where T = 5/12 yr,
S0=$50, K = $50, =30%, r = 10%.

EFD Method with Smax=$100, S=1.5, t=5/1200: $3.1414
EFD Method with Smax=$100, S=1, t=5/1200: -$2.8271E22
19

Methods
5.2.2 Numerical Stability
Numerical Accuracy
The problem itself
The discretization scheme used
The numerical algorithm used
21
Conditioning Issue
Suppose we have mathematically posed problem:

y = f ( x)
where y is to evaluated given an input x.
Let x* = x + x for small change x.
( )
If hen f x* is near f ( x ) , then we call the problem is

well - conditioned . Otherwise, it is ill-posed/ill-conditioned.
22
Conditioning Issue
Conditioning issue is related to the problem itself, not to the
specific numerical algorithm; Stability issue is related to the
numerical algorithm
One can not expect a good numerical algorithm to solve an illconditioned problem any more accurately than the data
warrant
But a bad numerical algorithm can produce poor solutions
even to well-conditioned problems
23
Conditional Issue
The concept "near" can be measured by further information about

the particular problem:
( )
f ( x ) f x*
f ( x)
x
x
( f ( x ) 0)
where C is called condition number of this problem. If C is large,

the problem is ill-conditioned.
24
Floating Point Number & Error

Let x be any real number.
Infinite decimal expansion : x = .x1 x2
xd
10 e
Truncated floating point number : x fl ( x ) = .x1 x2
xd 10 e
where x1 0, 0 xi 9,
d : an integer, precision of the floating point system
e : an bounded integer
Floating point or roundoff error : fl ( x ) x

25
Error Propagation
When additional calculations are done, there is an
accumulation of these floating point errors.
Example : Let x = 0.6667 and fl ( x ) = 0.667 10 0
where d = 3.
Floating point error : fl ( x ) x = 0.0003
Error propagatio n : fl ( x ) x = 0.00040011
2
26
Numerical Stability or Instability

Stability ensures if the error between the numerical
soltuion and the exact solution remains bounded
as numerical computation progresses.
( )
That is, f x* (the solution of a slightly perturbed problem)

is near f * ( x )( the computed solution) .
Stability concerns about the behavior of fi , j f ( it, jS )
as numerical computation progresses for fixed discretization
steps t and S.
27
Convergence issue
Convergence of the numerical algorithm concerns about
the behavior of fi , j f ( it, jS ) as t, S 0 for fixed
values ( it, jS ) .
For well-posed linear initial value problem,
Stability Convergence
(Lax's equivalence theorem, Richtmyer and Morton, "Difference
Methods for Initial Value Problems" (2nd) 1967)
28
Numerical Accuracy
These factors contribute the accuracy of a numerical solution.
We can find a good estimate if our problem is wellconditioned and the algorithm is stable
( )
f ( x) f ( x)
Well-conditioned: f ( x ) f ( x )
Stable: f * ( x ) f x*
29

Methods
5.2.3 Financial Interpretation of Numerical Instability
Financial Interpretation of instability

(Hall, page 423-4)
If f S and 2 f S 2 are assum ed to be the sam e at ( i + 1, j )
as they are at ( i, j ), we obtain equations of the form :
f = a f
+ b f
+ c f
(5.3)
i,j
i +1 , j 1
i +1 , j
i +1 , j +1
where
1
1 1
1
2 2
d
t j t r j =
1 + r t 2
2
1 + r t
1
1
2 2
b =
0
1 j t =
j
1 + r t
1 + r t
1
1 1
1
2 2
u
c j =
t j + t r j =
2
1 + r t 2
1 + r t
for
i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 .
a j =
i +1, j +1
i , j
i +1, j
d
i +1, j 1
These coefficients can be interpreted as probabilities times

a discount factor. If one of these probability < 0, instability
occurs.
Explicit Finite Difference Method as

Trinomial Tree
Check if the mean and variance of the

Expected value of the increase in asset price during t:
E [ ] = S d + 0 0 + S u = rjS t = rS t
Variance of the increment:
E 2 = ( S ) d + 0 0 + ( S ) u = 2 j 2 ( S ) 2 t = 2 S 2 t
2
Var [ ] = E 2 E 2 [ ] = 2 S 2 t r 2 S 2 ( t ) 2 S 2 t
2
which is coherent with geometric Brownian motion in a risk-neutral world
Change of Variable
Define Z = ln S. The B-S equation becomes

f 2 f 2 2 f
+r
+
= rf
2
2 Z 2 Z
t
The corresponding difference equation is
fi +1, j fi , j
t
2 fi +1, j +1 f i +1, j 1 2 f i +1, j +1 2 fi +1, j 1 + fi +1, j +1

+r
+
= rfi , j
2
2
2 Z
2
Z
or
fi , j = *j f i +1, j 1 + *j fi +1, j + *j f i +1, j +1
(5.4)
34
Change of Variable
where
2
2
t
*
j =
+
r
1 + r t
2 2Z 2 Z 2
t 2
1
*j =
1

2
1 + r t Z
2
2
t
*
j =
+
r
2
1 + r t
2 2 Z 2 Z
It can be shown that it is numerically most efficient if Z = 3t .

35
Reduced to Heat Equation

Get rid of the varying coefficients S and S by using
change of variables:
1
1
( k 1) x ( k +1)2
4
S = Ee x , t = T 2 2 , V (S , t ) = E e 2
u ( x, )
1 2
k =r
2
Equation (5.1) becomes heat equation (5.5):
u 2u
=
x2
(5.5)
for < x < + and > 0

36
Explicit Finite Difference Method

With u nm = u (n x,m ), this involves solving a system of
finite difference equations of the form :
u nm +1 u nm
u nm+1 2u nm + u nm1
2
+ O ( ) =
+ O (x )
2
(x )
Ignoring terms of O ( ) and O (x ) , we can approximat e

2
this by
u nm +1 = u nm+1 + (1 2 )u nm + u nm1
1 2
T
+
2
where =
,
for
and
0
1
-N
n
N
m
,
,...M
=
=
(x )2
Stability and Convergence

(P. Wilmott, et al, Option Pricing)
Stability:
The solution of Eqn (5.5) is
1
1
; ii) Unstable if >
i) Stable if 0 < =
2
2
( x ) 2
Convergence:
1
If 0 < , then the explicit finite-difference approximation
2
converges to the exact solution as , x 0
(in the sense that unm u ( n x, m ) as , x 0)
Rate of Convergence is O ( )
38

Methods
5.3.1 Implicit Finite-Difference Method
Implicit Finite Difference Methods

f
f
1 2 22f
In
+ rS
+ S
= r f , we use
2
t
S 2
S
f i +1,j f i ,j
f
forw ard difference:

t
t
f i , j + 1 f i , j 1
f
central difference:
,
S
2S
and
f i , j + 1 + f i , j 1 2 f i , j
2f
, rf = rf i , j
2
2
S
S

Rewriting the equation, we get an implicit scheme:
a j f i,j 1 + b j f i,j + c j f i,j +1 = f i +1, j
(5.6)
where
)
)
+ rj )
1
a j = t 2 j 2 + rj
2
2 2
b j = 1 + t j + r
cj
(
1
= t (
2
for i = N - 1, N - 2 , ..., 1, 0 and j = 1, 2 , ..., M - 1 .

S
Smax=MS
(j+1)S
jS
(j-1)S
0
(i-1)t it (i+1)t
T=N t
Implementation
Equation (5.6) can be rewritten in matrix form:
( 5.7 )
Cfi = fi +1 + bi
where fi and bi are (M 1) dimensional vectors

T
fi = fi ,1 , fi ,2 , fi ,3 , fi ,M 1 ,bi = a1 fi ,0 ,0 , 0 ,
and C is (M 1) (M 1) symmetric matrices
b1
a
2
C=0
c1
b2
a3
c2
b3
0
aM 1
0
0
cM 2
bM 1
, 0 , cM 1 fi ,M
Implementation
1. Starting with the final values f N , j , we need to solve a
linear system (5.7) to obtain f N 1, j for 1 j M 1
using LU factorization or iterative methods. We use the
boundary condition to determine f N 1,0 and f N -1,M .
2. Repeat the process to determine f N 2 , j and so on
44
Example
We compare implicit finite difference solution for a
European put with the exact Black-Scholes formula, where
T = 5/12 yr, S0=$50, K = $50, =30%, r = 10%.
IFD Method with Smax=$100, S=2, t=5/1200: $2.8194
45
Example (Stability)
We compare implicit finite difference solution for a European
put with the exact Black-Scholes formula, where T = 5/12 yr,
S0=$50, K = $50, =30%, r = 10%.

IFD Method with Smax=$100, S=1.5, t=5/1200: $3.1325
46
Implicit vs Explicit Finite Difference Methods
i +1, j +1
i , j
i +1, j
i +1, j 1
i , j +1
i , j
i , j 1
Implicit Method
Explicit Method
(always stable)
i +1, j
Implicit vs Explicit Finite Difference

Method
The explicit finite difference method is

equivalent to the trinomial tree approach:
Truncation error: O(t)
Stability: not always
The implicit finite difference method is
equivalent to a multinomial tree approach:
Truncation error: O(t)
Stability: always
48
Other Points on Finite Difference

Methods
It is better to have ln S rather than S as
the underlying variable in general
Improvements over the basic implicit and
explicit methods:
Crank-Nicolson method, average of
explicit and implicit FD methods, trying
to achieve
Truncation error: O((t)2 )
Stability: always

Methods
5.3.2 Solving a linear system using direct methods
Solve Ax=b
A x=b
Various shapes of matrix A
Lower triangular
Upper triangular
General
51
5.3.2.A Triangular Solvers
Example: 3 x 3 upper triangular system
4 6 1 x1 100
0 1 1 x = 10
2
0 0 4 x3 20
x3 = 20 / 4 = 5
x2 = 10 x3 = 5
4 x1 = 100 x3 6 * x2 = 65
x1 = 65 4
53
Solve an upper triangular system Ax=b
(0
0 aii
x1

x2
ain ) = aii xi + aij x j = bi ,i = 1, , n
j >i

x
n
xn = bn ann
xi = bi aij x j aii ,i = 1,
j >i
n 1
54
Implementation
Function x = UpperTriSolve(A, b)
n = length(b);
x(n) = b(n)/A(n,n);
for i = n-1:-1:1
sum = b(i);
for j = i+1:n
sum = sum - A(i,j)*x(j);
end
x(i) = sum/A(i,i);
end
55
5.3.2.B Gauss Elimination
To solve Ax=b for general form A
To solve Ax = b :
Suppose A = LU. Then
Ax = LUx = b
Solve two triangular systems :

1) solve z from Lz = b
2) solve x from Ux = z
57
Gauss Elimination
Goal: Make A an upper triangular matrix through using

fundamental row operations
For example, to zero the elements in the lower triangular part of A
1) Zero a21
1
a
21
a11
0
0 0 a11
1 0a21
a
0 1 31
E 21 A
a12
a22
a32
a13 a11
a23 = 0
a33 a
31
a12
a21 a12
a22
a11
a32
a13
a21 a13
a23
a11
a33
58
Gauss Elimination
2) Zero a31
a31
a11
a11
0 0
1 0 0
0 1 a31
a12
a22
a21 a12
a11
a32
E 31 E 21 A
a11
a13
a
a
12
13

a21 a13
a21 a13
a21 a12
a23
a23
= 0 a22
a11
a11
a11
a33
a31 a12
a31 a13

a33
0 a32
a11
a11
a11 a12 a13

= 0 a22 a23
0 a32 a33
59
Gauss Elimination
3) Zero a32
1
0
1
0
0 a32
a22
0 a11
0 0
a12
a22
a32
a13 a11
a23 = 0
a33
0
a12
a22
0
a13
a23
U
a32 a23
a33
a22
E 32 E 31 E 21 A = U
lower triangular
60
Gauss Elimination
Claim 1:
E 32 E 31 E 21
Claim 2:
( E 32 E 31 E 21 )
1
a 21
a1 1
a 31
a1 1
1
a 21
=
a11
a 31
a11
0
1
a 32
a 22
0
1
a 32
a 22
61
LU Factorization
Therefore, through Gauss Elimination, we have

E 32 E 31 E 21A = U
A = (E 32 E 31 E 21 ) U
1
A = LU
It is called LU factorization. When A is symmetric,
A = LLT which is called Cholesky Decomposition

62
To solve Ax=b for general form A
To solve Ax = b becomes
1) Use Gauss elimination to make A upper triangular, i.e.
L1Ax = L1b Ux = z
2) Solve x from Ux = z
This suggests that when doing Gauss elimination, we can do it
to the augmented matrix [A b] associated with the linear system.
63
An exercise
% build the matrix A

A = [2, -1, 0; -1, 2, -1; 0, -1, 2]
2 1
x1 0
1 2 1 x = 0
1 2 x3 4
% build the vector b

x_true = [1:3]';
b = A * x_true;
% lu decomposition of A
[l, u] = lu(A)
% solve z from lz = b where z = ux
z = l\b;
% solve x from ux = z
x = u\z
64
General Gauss Elimination
row i
row j -
a ji
aii
row i
65
What if we have zero or very small

diagonal elements?
Somtimes, we need to permute rows of A so that Gauss eliminatio n
can be computed or computed stably, i.e., PA = LU. This is called
partial pivoting.
For example
0
A=
2
1
3
0 1 0 1 2 3
PA =
=
1
0
2
3
0
1
1
0 0.0001
0.0001 1 1
=
= LU
A=
- 9999
1 10,000 1 0
1
0 1
1
0 1 0.0001 1 1
=
= LU
PA =
1
1 0.0001 1 0 .9999
Math6911, S08, HM 1
ZHU 0
66
Can we always have A = LU?
No!
If det ( A (1:k,1:k ) ) 0 for k =1,...,n-1,
then A Rnxn has an LU factorization.
Proof:
See Golub and Loan, Matrix Computation, 3rd edition
67

Methods
5.4.1 Crank-Nicolson Method

f
f
1 2 22f
+ rS
+ S
= rf ,
W ith
2
t
S 2
S
we can obtain an explicite form :
f i +1 , j f i , j
t
rj S
+ O ( t ) =
f i +1 , j +1 f i +1 , j 1
+ rf i +1 , j + O
2S
(( S ) )
2
1 2 2
2 f i + 1 , j + 1 + f i + 1 , j 1 2 f i + 1 , j
j ( S )
S2
2

f
f
1 2 22f
+ rS
+ S
= r f,
W ith
2
t
S 2
S
we can obtain an im plicit form :
f i +1 , j f i , j
t
rj S
+ O ( t ) =
f i , j +1 f i , j 1
+ rf i , j + O
2S
(( S ) )
2
1 2 2
2 f i , j + 1 + f i , j 1 2 f i , j
j ( S )
S2
2
Crank-Nicolson Methods: average of explicit

and implicit methods
(Brandmarte, p485)
fi+1, j fi, j
+ O ( t ) =
2
t
rjS fi+1, j +1 fi+1, j 1 fi, j +1 fi, j 1
2
2S
2S
fi, j +1 + fi, j 1 2 fi, j
1 2 2
2 fi +1, j +1 + fi +1, j 1 2 fi +1, j
j ( S )
+
2
2
S
S
4
r
2
+ ( fi+1, j + fi, j ) + O ( S )
2
Crank-Nicolson Methods
R e w ritin g th e e q u a tio n , w e g e t a n C ra n k -N ic o ls o n s c h e m e :
(
)f
+ (1 + ) f
j f i , j 1 + 1
j f i + 1 , j 1
i,j
i +1 , j
j f i , j +1 =
+ j f i +1 , j +1
(5 .5 )
w h e re
t
2 j 2 rj
4
t
2 j2 + r
j =
2
t
j=
2 j 2 + rj
4
fo r i = N - 1 , N - 2 , ..., 1 , 0 a n d j = 1 , 2 , ..., M - 1 .
j=
S
Smax=MS
(j+1)S
jS
(j-1)S
0
(i-1)t it (i+1)t
T=N t
Implementation
Equation (5.5) can be rewritten in matrix form:
M1fi = M 2fi +1 + b
where fi and bi are (M 1) dimensional vectors
fi = fi ,1 , fi ,2 , fi ,3
, fi ,M 1 ,
b = 1 ( fi ,0 + fi +1,0 ) , 0
, M 1 ( fi ,M + f i +1,M )
and M1 and M 2 are (M 1) (M 1) symmetric matrices

1 1 1

1
2
2
M1 = 0
3
M 2
1 M 1
0
0
M 1
Implementation
and
0
0
1
1 + 1

1
0
+
2
2
2
M2 = 0
3
M 2
0
0 M 1 1 + M 1
75
Example
We compare Crank-Nicolson Methods for a European put
with the exact Black-Scholes formula, where T = 5/12 yr,
S0=$50, K = $50, =30%, r = 10%.
CN Method with Smax=$100, S=2, t=5/1200: $2.8241
76
Example (Stability)
We compare Crank-Nicolson Method for a European put with
the exact Black-Scholes formula, where T = 5/12 yr, S0=$50,
K = $50, =30%, r = 10%.
CN Method with Smax=$100, S=1.5, t=5/1200: $3.1370
77
Example: Barrier Options

Barrier options are options where the payoff depends on whether
the underlying assets price reaches a certain level during a certain
period of time.
Types:
knock-out: option ceases to exist when the asset price reaches a barrier
Knock-in: option comes into existence when the asset price reaches a barrier
78
Example: Barrier Option

We compare Crank-Nicolson Method for a European downand-out put, where T = 5/12 yr, S0=$50, K = $50, Sb=$50
=40%, r = 10%.
What are the boundary conditions for S?
79
Example: Barrier Option

We compare Crank-Nicolson Method for a European downand-out put, where T = 5/12 yr, S0=$50, K = $50, Sb=$50
=40%, r = 10%.
Boundary conditions are
f ( t,S max ) = 0 and f ( t,Sb ) = 0
Exact Price (Hall, p533-535): $0.5424

CN Method with Smax=$100, S=0.5, t=1/1200: $0.5414
80
Appendix A.
Matrix Norms
Vector Norms
- Norms serve as a way to measure the length of a vector or a matrix
- A vector norm is a function mapping x n to a real number x s.t.
x > 0 for any x 0; x = 0 iff x = 0
c x = c x for any c
x + y x + y for any x, y n
- There are various ways to define a norm
p
xi
i =1
max xi
n
x
x
(p = 2 is the Euclidean norm )
1 i n
For example, v = [2 4 - 1 3]. v 1 = ?, v
= ?, v 2 = ?
82
Matrix Norms
- Similarly, a matrix norm is a function mapping A mn to a real number A s.t.
A > 0 for any A 0; A = 0 iff A = 0
c A = c A for any c
A + B A + B for any A, B mn
- Various commonly used matrix norms
A
Ax
sup
x0
A 1 max
1 j n i =1
aij
i =1 j =1
m
ij
max
1 i m
a
j =1
A 2 A T A , the spectral norm, where
ij
(B ) max{k : k is an eigenvalue of B}
An Example
2 4 1
A= 3 1 5
2 3 1
A
=?
A1 =?
A 2 =?
A
=?
84
Basic Properties of Norms
Let A, B
nn
and x, y . Then
n
1. x 0; and x = 0 x = 0
2. x + y x + y
3. x = x where is a real number
4. Ax A x
5. AB A B
85
Condition number of a square matrix
All norms in n mn are equivalent. That is, if and are norms

on n , then c1 ,c2 > 0 such that for all x n , we have
c1 x x
c2 x
Condition Number of A Matrix: C A A1 , where A nn .

The condition number gives a measure of how close a matrix is
close to singular. The bigger the C, the harder it is to solve Ax = b.
86
Convergence
- vectors x k converges to x x k x converges to 0

- matrix A k 0 A k 0 0
87
Appendix B.
Basic Row Operations
Basic row operations
Three kinds of basic row operations:

1) Interchange the order of two rows or (equations)
0 1 0a11
1 0 0a21
0 0 1a31
a12
a22
a32
a13 a21 a22

a23 = a11 a12
a33 a31 a32
a23
a13
a33
89
Basic row operations
2) Multiply a row by a nonzero constant

c 0 0a11 a12
0 1 0a21 a22
0 0 1a31 a32
a13 ca11 ca12

a23 = a21 a22
a33 a31 a32
ca13
a23
a33
3) Add or subtract rows

1 0 0 a11 a12 a13 a11
a12

1
1
0
a
a
a
a22 a12
22
23 = a21 a11
21
0 0 1a31 a32 a33 a31
a32
a13
a23 a13
a33
90

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