A Kurganov-Tadmor numerical method for option pricing under the constant elasticity of variance model

الموضوعات :

Sakineh Ghiasi ¹ , Nouredin Parandin ²

1 - Department of Mathematics, Payame Noor University, Tehran, Iran
2 - Department of Mathematics, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran

تاريخ الإرسال : 07 الأربعاء , جمادى الثانية, 1442 تاريخ التأكيد : 12 الخميس , شعبان, 1442 تاريخ الإصدار : 02 الجمعة , ذو الحجة, 1443

الکلمات المفتاحية: Kurganov-Tadmor method, Constant elasticity of variance, option price,

ملخص المقالة :

The primary goal of option pricing theory is to calculate the probability that an option will be exercised at expiration and assign a dollar value to it. Options pricing theory also derives various risk factors or sensitivities based on those inputs, since market conditions are constantly changing, these factors provide traders with a means of determining how sensitive a specific trade is to price fluctuations, volatility fluctuations, and the passage of time. In this study, we derive a new exact solution for pricing European options using Kurganov-Tadmor when the underlying process follows the constant elasticity of variance model. This method was successfully applied to nonlinear convection-diffusion equations by Kurganov and Tadmor. Also, we provide computational results showing the performance of the method for European option pricing problems. The results showed that the proposed method is convenient to calculate the option price for K=3,β=(-3)/4,and N=200.

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