Numerical Pricing American-style Options within the Black-Scholes Framework

Kód výsledku v IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F18%3A10243827" target="_blank" >RIV/61989100:27510/18:10243827 - isvavai.cz</a>

Výsledek na webu

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DOI - Digital Object Identifier

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Jazyk výsledku

angličtina

Název v původním jazyce

Numerical Pricing American-style Options within the Black-Scholes Framework

Popis výsledku v původním jazyce

Option pricing is one of the classical problems in financial engineering. Since exact solutions in analytical form are available for simple option contracts in particular, a numerical approach is desirable due to the fact that relaxed standard assumptions do not allow the construction of such solutions. In this paper, we consider the problem of pricing American-style options in the classical Black-Scholes framework; that is, we admit the early exercise feature. This constraint can be viewed as an additional non-linear source term in the option-pricing partial differential equation. The contribution of the paper lies in the proposal of a numerical scheme to solve this pricing equation and in the relationship of the presented technique with the existing pricing approaches. The numerical approach is based on the modification of the discontinuous Galerkin method incorporating a penalty term that handles the early exercise constraint. The capabilities of the scheme derived are documented using reference experiments and compared with the standard finite difference method.

Název v anglickém jazyce

Numerical Pricing American-style Options within the Black-Scholes Framework

Popis výsledku anglicky

Option pricing is one of the classical problems in financial engineering. Since exact solutions in analytical form are available for simple option contracts in particular, a numerical approach is desirable due to the fact that relaxed standard assumptions do not allow the construction of such solutions. In this paper, we consider the problem of pricing American-style options in the classical Black-Scholes framework; that is, we admit the early exercise feature. This constraint can be viewed as an additional non-linear source term in the option-pricing partial differential equation. The contribution of the paper lies in the proposal of a numerical scheme to solve this pricing equation and in the relationship of the presented technique with the existing pricing approaches. The numerical approach is based on the modification of the discontinuous Galerkin method incorporating a penalty term that handles the early exercise constraint. The capabilities of the scheme derived are documented using reference experiments and compared with the standard finite difference method.

Druh

J_ost - Ostatní články v recenzovaných periodicích

CEP obor

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OECD FORD obor

50200 - Economics and Business

Projekt

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Návaznosti

S - Specificky vyzkum na vysokych skolach

Rok uplatnění

2018

Kód důvěrnosti údajů

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Název periodika

Ekonomická revue

ISSN

1212-3951

e-ISSN

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Svazek periodika

22

Číslo periodika v rámci svazku

4

Stát vydavatele periodika

CZ - Česká republika

Počet stran výsledku

7

Strana od-do

117-123

Kód UT WoS článku

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EID výsledku v databázi Scopus

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