A hybrid finite difference method for pricing two-asset double barrier options

Y. L. Hsiao, Shih-Yu Shen, Andrew M.L. Wang

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

The pricing of the two-asset double barrier option is modeled as an initial-boundary value problem of the two-dimensional Black-Scholes partial differential equation. We use the hybrid finite different method to solve the problem. The hybrid method is a combination of the Laplace transform and a finite difference method. It is more efficient than a traditional finite difference method to obtain a solution without a step-by-step process. The method is implemented on a computer. Two numerical examples are calculated to verify the performance of the hybrid method. In our numerical examples, the convergence rate of the method is approximately two. We conclude that the method is efficient for pricing two-asset barrier options.

Original language English 692695 Mathematical Problems in Engineering 2015 https://doi.org/10.1155/2015/692695 Published - 2015 Jan 1

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Barrier Options
Finite difference method
Difference Method
Pricing
Finite Difference
Laplace transforms
Hybrid Method
Boundary value problems
Partial differential equations
Costs
Numerical Examples
Black-Scholes
Laplace transform
Initial-boundary-value Problem
Rate of Convergence
Partial differential equation
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All Science Journal Classification (ASJC) codes

• Mathematics(all)
• Engineering(all)

Cite this

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A hybrid finite difference method for pricing two-asset double barrier options. / Hsiao, Y. L.; Shen, Shih-Yu; Wang, Andrew M.L.

In: Mathematical Problems in Engineering, Vol. 2015, 692695, 01.01.2015.

Research output: Contribution to journalArticle

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AB - The pricing of the two-asset double barrier option is modeled as an initial-boundary value problem of the two-dimensional Black-Scholes partial differential equation. We use the hybrid finite different method to solve the problem. The hybrid method is a combination of the Laplace transform and a finite difference method. It is more efficient than a traditional finite difference method to obtain a solution without a step-by-step process. The method is implemented on a computer. Two numerical examples are calculated to verify the performance of the hybrid method. In our numerical examples, the convergence rate of the method is approximately two. We conclude that the method is efficient for pricing two-asset barrier options.

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