Numerical solution of a two-asset option valuation PDE by ADI finite difference discretization | Zendy

Karel in ’t Hout | Zendy; Radoslav L. Valkov | Zendy

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Numerical solution of a two-asset option valuation PDE by ADI finite difference discretization

Author(s) -

Karel in ’t Hout,

Radoslav L. Valkov

Publication year - 2015

Publication title -

aip conference proceedings

Language(s) - English

Resource type - Conference proceedings

SCImago Journal Rank - 0.177

H-Index - 75

eISSN - 1551-7616

pISSN - 0094-243X

DOI - 10.1063/1.4912311

Subject(s) - discretization , black–scholes model , mathematics , valuation of options , valuation (finance) , finite difference method , finite difference , convergence (economics) , mathematical optimization , mathematical analysis , finance , econometrics , economics , economic growth , volatility (finance)

The numerical valuation of European two-asset options is considered under the Black–Scholes model. A numerical method is discussed based on FD discretization of the pertinent PDE on nonuniform grids and subsequent discretization in time by ADI schemes. We investigate stability and convergence experimentally for both the option value function and the Cross Gamma function, which is important to nonlinear extensions of the model, beyond the standard Black–Scholes framework.

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