The Time-Discrete Method of Lines for Options and Bonds

Download or read book The Time-Discrete Method of Lines for Options and Bonds written by Gunter H Meyer and published by World Scientific. This book was released on 2014-11-27 with total page 288 pages. Available in PDF, EPUB and Kindle. Book excerpt: Few financial mathematical books have discussed mathematically acceptable boundary conditions for the degenerate diffusion equations in finance. In The Time-Discrete Method of Lines for Options and Bonds, Gunter H Meyer examines PDE models for financial derivatives and shows where the Fichera theory requires the pricing equation at degenerate boundary points, and what modifications of it lead to acceptable tangential boundary conditions at non-degenerate points on computational boundaries when no financial data are available. Extensive numerical simulations are carried out with the method of lines to examine the influence of the finite computational domain and of the chosen boundary conditions on option and bond prices in one and two dimensions, reflecting multiple assets, stochastic volatility, jump diffusion and uncertain parameters. Special emphasis is given to early exercise boundaries, prices and their derivatives near expiration. Detailed graphs and tables are included which may serve as benchmark data for solutions found with competing numerical methods. Contents:Comments on the Pricing Equations in FinanceThe Method of Lines (MOL) for the Diffusion EquationThe Riccati Transformation Method for Linear Two Point Boundary Value ProblemsEuropean OptionsAmerican Puts and CallsBonds and Options for One-Factor Interest Rate ModelsTwo-Dimensional Diffusion Problems in Finance Readership: Advanced mathematics and quantitative finance graduates, researchers, and practising financial pracitioners. Key Features:No other book discusses mathematically acceptable boundary conditions for the degenerate diffusion equations in financeThis book emphasizes on numerical early exercise boundaries and solutions near expirationIt presents extensive numerical data against which the results from competing numerical methods can be comparedKeywords:Options;Bonds;PDE Formulation;Numerical Solution;Method of Lines;Stochastic Volatility;Jump Diffusion;Uncertain Parameters