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

Document Type : Research Paper

Authors

1 Department of Mathematics, Islamic Azad University, Kermanshah, Iran

2 Department of Mathematics, Payame Noor University, Tehran, Iran

10.22034/amfa.2021.1891263.1363

Abstract

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.

Keywords


  • Receive Date: 20 January 2020
  • Revise Date: 15 March 2021
  • Accept Date: 25 April 2021
  • First Publish Date: 03 May 2021