Finite difference method for basket option pricing under Merton model

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Karami Parisa; Safdari vaighani ali

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Journal Paper

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Journal: Journal of Mathematics and Modeling in Finance Year:2021 | Volume:1 | Issue:1 Page(s): 59-63

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Title

Finite difference method for basket option pricing under Merton model

Author(s)

Karami Parisa | Safdari vaighani ali | Issue Writer Certificate

Keywords

basket option pricing

jump-diffusion models

finite difference method

Abstract

In financial markets, dynamics of underlying assets are often specified via stochastic differential equations of jump-diffusion type. In this paper, we suppose that two financial assets evolved by correlated Brownian motion. The value of a contingent claim written on two underlying assets under jump diffusion model is given by two-dimensional parabolic partial integro-differential equation ( P I D E ), which is an extension of the Black-Scholes equation with a new integral term. We show how basket option prices in the jump-diffusion models, mainly on the Merton model, can be approximated using finite difference method. To avoid a dense linear system solution, we compute the integral term by using the Trapezoidal method. The numerical results show the efficiency of proposed method.

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APA: Copy

Karami, Parisa, & Safdari vaighani, ali. (2021). Finite difference method for basket option pricing under Merton model. JOURNAL OF MATHEMATICS AND MODELING IN FINANCE, 1(1), 59-63. SID. https://sid.ir/paper/982202/en

Vancouver: Copy

Karami Parisa, Safdari vaighani ali. Finite difference method for basket option pricing under Merton model. JOURNAL OF MATHEMATICS AND MODELING IN FINANCE[Internet]. 2021;1(1):59-63. Available from: https://sid.ir/paper/982202/en

IEEE: Copy

Parisa Karami, and ali Safdari vaighani, “Finite difference method for basket option pricing under Merton model,” JOURNAL OF MATHEMATICS AND MODELING IN FINANCE, vol. 1, no. 1, pp. 59–63, 2021, [Online]. Available: https://sid.ir/paper/982202/en

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