In this paper, we present a finite volume method for pricing European call option using Black-Scholes equation with regime-switching volatility. In the first step, we formulate the Black-Scholes equations with regime-switching volatility. we use a finite volume method based on fitted finite volume with spatial discretization and an implicit time stepping technique for the case. We show that the regime-switching scheme can revert to the non-switching Black Scholes equation, both in theoretical evidence and numerical simulations.
|Journal of Physics: Conference Series
|Published - 22 Mar 2018
|3rd International Conference on Mathematics: Pure, Applied and Computation, ICoMPAC 2017 - Surabaya, Indonesia
Duration: 1 Nov 2017 → 1 Nov 2017