scholarly journals A Second-order Finite Difference Method for Option Pricing Under Jump-diffusion Models

2011 ◽  
Vol 49 (6) ◽  
pp. 2598-2617 ◽  
Author(s):  
YongHoon Kwon ◽  
Younhee Lee
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Option Pricing ◽  
Difference Method ◽  
Jump Diffusion ◽  
Diffusion Models ◽  
Second Order

Analytical approximation for spread option pricing in local volatility model

2017 ◽  
Vol 04 (04) ◽  
pp. 1750022
Author(s):  
Ying Yang
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Option Pricing ◽  
Difference Method ◽  
Analytical Approximation ◽  
Second Order ◽  
Local Volatility ◽  
Local Volatility Model ◽  
Volatility Model ◽  
Spread Option

This paper introduces a methodology of analytical approximation in general European option-pricing case based on local volatility model and then apply it to price a European Spread Option. The approximation procedure is flexible in pricing financial derivatives with any form of volatility, drift rate, risk-free rate and payoff function. We also work out the explicit pricing formula up to the second-order approximation of spread option which is good-fitting compared with finite difference method and Monte Carlo simulation. The relative error compared to finite difference method is no more than 5%, which attests to the accuracy of our second-order closed-form formulas.

scholarly journals A comparison of finite-difference and fourier method calculations of synthetic seismograms

1989 ◽  
Vol 79 (4) ◽  
pp. 1210-1230
Author(s):  
C. R. Daudt ◽  
L. W. Braile ◽  
R. L. Nowack ◽  
C. S. Chiang
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Group Velocity ◽  
Fourth Order ◽  
Difference Method ◽  
Fourier Method ◽  
Velocity Model ◽  
Second Order ◽  
Heterogeneous Model ◽  
Difference Calculation

Abstract The Fourier method, the second-order finite-difference method, and a fourth-order implicit finite-difference method have been tested using analytical phase and group velocity calculations, homogeneous velocity model calculations for disperson analysis, two-dimensional layered-interface calculations, comparisons with the Cagniard-de Hoop method, and calculations for a laterally heterogeneous model. Group velocity rather than phase velocity dispersion calculations are shown to be a more useful aid in predicting the frequency-dependent travel-time errors resulting from grid dispersion, and in establishing criteria for estimating equivalent accuracy between discrete grid methods. Comparison of the Fourier method with the Cagniard-de Hoop method showed that the Fourier method produced accurate seismic traces for a planar interface model even when a relatively coarse grid calculation was used. Computations using an IBM 3083 showed that Fourier method calculations using fourth-order time derivatives can be performed using as little as one-fourth the CPU time of an equivalent second-order finite-difference calculation. The Fourier method required a factor of 20 less computer storage than the equivalent second-order finite-difference calculation. The fourth-order finite-difference method required two-thirds the CPU time and a factor of 4 less computer storage than the second-order calculation. For comparison purposes, equivalent runs were determined by allowing a group velocity error tolerance of 2.5 per cent numerical dispersion for the maximum seismic frequency in each calculation. The Fourier method was also applied to a laterally heterogeneous model consisting of random velocity variations in the lower half-space. Seismograms for the random velocity model resulted in anticipated variations in amplitude with distance, particularly for refracted phases.

scholarly journals Option Pricing under Risk-Minimization Criterion in an Incomplete Market with the Finite Difference Method

2013 ◽  
Vol 2013 ◽  
pp. 1-9 ◽  
Author(s):  
Xinfeng Ruan ◽  
Wenli Zhu ◽  
Shuang Li ◽  
Jiexiang Huang
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Option Pricing ◽  
Difference Method ◽  
Incomplete Market ◽  
Martingale Measure ◽  
Risk Minimization ◽  
European Option ◽  
The Finite Difference Method ◽  
Nikodym Derivative

We study option pricing with risk-minimization criterion in an incomplete market where the dynamics of the risky underlying asset is governed by a jump diffusion equation with stochastic volatility. We obtain the Radon-Nikodym derivative for the minimal martingale measure and a partial integro-differential equation (PIDE) of European option. The finite difference method is employed to compute the European option valuation of PIDE.

scholarly journals A Comparative Study between Implicit and Crank-Nicolson Finite Difference Method for Option Pricing

2020 ◽  
Vol 40 (1) ◽  
pp. 13-27
Author(s):  
Tanmoy Kumar Debnath ◽  
ABM Shahadat Hossain
Keyword(s):  
Finite Difference ◽  
Finite Difference Method ◽  
Option Pricing ◽  
Difference Method ◽  
Finite Difference Methods ◽  
Put Option ◽  
Black Scholes ◽  
Implicit Finite Difference ◽  
Difference Methods ◽  
Crank Nicolson

In this paper, we have applied the finite difference methods (FDMs) for the valuation of European put option (EPO). We have mainly focused the application of Implicit finite difference method (IFDM) and Crank-Nicolson finite difference method (CNFDM) for option pricing. Both these techniques are used to discretized Black-Scholes (BS) partial differential equation (PDE). We have also compared the convergence of the IFDM and CNFDM to the analytic BS price of the option. This turns out a conclusion that both these techniques are fairly fruitful and excellent for option pricing. GANIT J. Bangladesh Math. Soc.Vol. 40 (2020) 13-27

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