| Abstract: | In this paper, we study carbon emission trading whose market is gaining popularity as a policy instrument for global climate change. The mathematical model
is presented for pricing options on $CO_2$ emission allowance futures with jump diffusion
processes, and a so-called fitted finite volume method is proposed to solve the
pricing model for the spatial discretization, in which the Crank-Nicolson is employed
for time stepping. In addition, the stability and the convergence of the fully discrete
scheme are given, and some numerical results, which are compared with the closed
form solution and the Monte Carlo simulation solution, are provided to demonstrate
the rates of convergence and the robustness of the numerical method. |
