Abstract
In this paper, we briefly review the finite difference method (FDM) for the Black-Scholes (BS) equations for pricing derivative securities and provide the MATLAB codes in the Appendix for the one-, two-, and three-dimensional numerical implementation. The BS equation is discretized non-uniformly in space and implicitly in time. The two-and three-dimensional equations are solved using the operator splitting method. In the numerical tests, we show characteristic examples for option pricing. The computational results are in good agreement with the closed-form solutions to the BS equations.
Original language | English |
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Article number | 391 |
Journal | Mathematics |
Volume | 8 |
Issue number | 3 |
DOIs | |
Publication status | Published - 2020 Mar 1 |
Keywords
- Black-scholes equations
- Finite difference method
- Operator splitting method
- Option pricing
ASJC Scopus subject areas
- Mathematics(all)