Open AccessA numerical method for valuation of european option with regime-switching volatility and interest rate
Author(s) -
Endah Rokhmati Merdika Putri,
Chairul Imron,
Mey Lista Tauryawati
Publication year - 2019
Publication title -
journal of physics. conference series
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.21
H-Index - 85
eISSN - 1742-6596
pISSN - 1742-6588
DOI - 10.1088/1742-6596/1218/1/012051
Subject(s) - discretization , local volatility , valuation (finance) , black–scholes model , interest rate , volatility (finance) , valuation of options , volatility smile , numerical analysis , implied volatility , mathematics , stochastic volatility , mathematical optimization , computer science , econometrics , economics , mathematical analysis , finance
This paper develops a numerical method for pricing European options with regime-switching volatility and interest rate governed by the Black-Scholes equation. The method is based on a finite volume method with a spatial discretization and implicit time stepping technique. We show that the system matrix of the discretized system is an M -matrix and present an algorithm for solving the problem. Numerical experiment are implemented for some European option problems to illustrate the usefulness of this method.