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http://dx.doi.org/10.4134/BKMS.2013.50.6.2035

COMPARISON OF NUMERICAL SCHEMES ON MULTI-DIMENSIONAL BLACK-SCHOLES EQUATIONS  

Jo, Joonglee (Department of Financial Engineering Ajou University)
Kim, Yongsik (Department of Financial Engineering Ajou University)
Publication Information
Bulletin of the Korean Mathematical Society / v.50, no.6, 2013 , pp. 2035-2051 More about this Journal
Abstract
In this paper, we study numerical schemes for solving multi-dimensional option pricing problem. We compare the direct solving method and the Operator Splitting Method(OSM) by using finite difference approximations. By varying parameters of the Black-Scholes equations for the maximum on the call option problem, we observed that there is no significant difference between the two methods on the convergence criterion except a huge difference in computation cost. Therefore, the two methods are compatible in practice and one can improve the time efficiency by combining the OSM with parallel computation technique. We show numerical examples including the Equity-Linked Security(ELS) pricing based on either two assets or three assets by using the OSM with the Monte-Carlo Simulation as the benchmark.
Keywords
Black-Scholes equation; operator splitting method; equity-linked security; parallel computation; message passing interface;
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