A numerical method for valuation of european option with regime-switching volatility and interest rate

Endah R.M. Putri; Chairul Imron; Mey Lista Tauryawati

doi:10.1088/1742-6596/1218/1/012051

A numerical method for valuation of european option with regime-switching volatility and interest rate

Endah R.M. Putri
, Chairul Imron
, Mey Lista Tauryawati

Institut Teknologi Sepuluh Nopember

Research output: Contribution to journal › Conference article › peer-review

Abstract

This paper develops a numerical method for pricing European options with regime-switching volatility and interest rate governed by the Black-Scholes equation. The method is based on a finite volume method with a spatial discretization and implicit time stepping technique. We show that the system matrix of the discretized system is an M-matrix and present an algorithm for solving the problem. Numerical experiment are implemented for some European option problems to illustrate the usefulness of this method.

Original language	English
Article number	012051
Journal	Journal of Physics: Conference Series
Volume	1218
Issue number	1
DOIs	https://doi.org/10.1088/1742-6596/1218/1/012051
Publication status	Published - 31 May 2019
Event	3rd International Conference on Mathematics; Pure, Applied and Computation, ICoMPAC 2018 - Surabaya, Indonesia Duration: 20 Oct 2018 → …

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abstract = "This paper develops a numerical method for pricing European options with regime-switching volatility and interest rate governed by the Black-Scholes equation. The method is based on a finite volume method with a spatial discretization and implicit time stepping technique. We show that the system matrix of the discretized system is an M-matrix and present an algorithm for solving the problem. Numerical experiment are implemented for some European option problems to illustrate the usefulness of this method.",

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N2 - This paper develops a numerical method for pricing European options with regime-switching volatility and interest rate governed by the Black-Scholes equation. The method is based on a finite volume method with a spatial discretization and implicit time stepping technique. We show that the system matrix of the discretized system is an M-matrix and present an algorithm for solving the problem. Numerical experiment are implemented for some European option problems to illustrate the usefulness of this method.

AB - This paper develops a numerical method for pricing European options with regime-switching volatility and interest rate governed by the Black-Scholes equation. The method is based on a finite volume method with a spatial discretization and implicit time stepping technique. We show that the system matrix of the discretized system is an M-matrix and present an algorithm for solving the problem. Numerical experiment are implemented for some European option problems to illustrate the usefulness of this method.

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A numerical method for valuation of european option with regime-switching volatility and interest rate

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