Finite difference method for basket option pricing under Merton model
| Autor: | Parisa Karami, Ali Safdari |
|---|---|
| Jazyk: | angličtina |
| Rok vydání: | 2021 |
| Předmět: | |
| Zdroj: | Mathematics and Modeling in Finance, Vol 1, Iss 1, Pp 69-73 (2021) |
| Druh dokumentu: | article |
| ISSN: | 2783-0578 2783-056X |
| DOI: | 10.22054/jmmf.2021.56261.1018 |
| Popis: | In financial markets , dynamics of underlying assets are often specified via stochasticdifferential equations of jump - diffusion type . In this paper , we suppose that two financialassets evolved by correlated Brownian motion . The value of a contingent claim written on twounderlying assets under jump diffusion model is given by two - dimensional parabolic partialintegro - differential equation ( P I D E ) , which is an extension of the Black - Scholes equation witha new integral term . We show how basket option prices in the jump - diffusion models , mainlyon the Merton model , can be approximated using finite difference method . To avoid a denselinear system solution , we compute the integral term by using the Trapezoidal method . Thenumerical results show the efficiency of proposed method .Keywords: basket option pricing, jump-diffusion models, finite difference method. |
| Databáze: | Directory of Open Access Journals |
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