An Eulerian‐Lagrangian method for option pricing in finance |
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| Authors: | Zheng Wang Mohamed Al‐Lawatia Hong Wang |
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| Institution: | 1. College of Economics, Liaoning University, Shenyang, Liaoning 100036;2. and Institute of Economics, Academy of Social Science, Jinan, Shandong 250100, China;3. Department of Mathematics and Statistics, Sultan Qaboos University, Muscat, Sultanate of Oman;4. Department of Mathematics, University of South Carolina, Columbia, South Carolina 29208Department of Mathematics, University of South Carolina, Columbia, SC 29208 |
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| Abstract: | This article is devoted to the development and application of an Eulerian‐Lagrangian method (ELM) for the solution of the Black‐Scholes partial differential equation for the valuation of European option contracts. This method fully utilizes the transient behavior of the governing equations and generates very accurate option's fair values and their derivatives also known as option Greeks, even if coarse spatial grids and large time steps are used. Numerical experiments on two standard option contracts are presented which show that the ELM method (favorably) compares in terms of accuracy and efficiency to many other well‐perceived methods. © 2006 Wiley Periodicals, Inc. Numer Methods Partial Differential Eq 23: 293–329, 2007 |
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| Keywords: | financial mathematics mathematical finance option‐pricing Black‐Scholes equations Eulerian‐Lagrangian methods efficient simulation of option pricing |
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