A fitted L-Multi-point Flux Approximation method for pricing options

In this paper, we introduce a special kind of finite volume method called Multi-Point Flux Approximation method (MPFA) to price European and American options in two dimensional domain. We focus on the L-MPFA method for space discretization of the diffusion term of Black-Scholes operator. The degener...

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Bibliographic Details
Published in:arXiv.org 2019-12
Main Authors: Rock, Stephane Koffi, Tambue, Antoine
Format: Article
Language:English
Subjects:
Approximation
Finite volume method
Mathematical analysis
Pricing
Online Access:Get full text
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Summary:In this paper, we introduce a special kind of finite volume method called Multi-Point Flux Approximation method (MPFA) to price European and American options in two dimensional domain. We focus on the L-MPFA method for space discretization of the diffusion term of Black-Scholes operator. The degeneracy of the Black Scholes operator is tackled using the fitted finite volume method. This combination of fitted finite volume method and L-MPFA method coupled to upwind methods gives us a novel scheme called the fitted L-MPFA method. Numerical experiments show the accuracy of the novel fitted L-MPFA method comparing to well known schemes for pricing options.
ISSN:2331-8422