Pricing european options on zero-coupon bonds with a fitted finite volume method

Kai Zhang, Xiaoqi Yang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

6 Citations (Scopus)

Abstract

We present a novel numerical scheme to price European options on discount bond, where the single factor models are adopted for the short interest rate. This method is based on a fitted finite volume (FFVM) scheme for the spatial discretization and an implicit scheme for the time discretization. We show that this scheme is consistent, stable and monotone, hence it ensures the convergence to the solution of continuous problem. Numerical experiments are performed to verify the effectiveness and usefulness of this new method.
Original languageEnglish
Pages (from-to)405-418
Number of pages14
JournalInternational Journal of Numerical Analysis and Modeling
Volume14
Issue number3
Publication statusPublished - 1 Jan 2017

Keywords

  • Finite volume method
  • Option pricing
  • Partial differential equation

ASJC Scopus subject areas

  • Numerical Analysis

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