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Volume 14, Issue 3
Pricing European Options on Zero-Coupon Bonds with a Fitted Finite Volume Method

Kai Zhang & Xiao-Qi Yang

Int. J. Numer. Anal. Mod., 14 (2017), pp. 405-418.

Published online: 2017-06

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  • 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.

  • Keywords

Option pricing, finite volume method, partial differential equation.

  • AMS Subject Headings

91G60, 65M12, 65M60

  • Copyright

COPYRIGHT: © Global Science Press

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@Article{IJNAM-14-405, author = {Zhang , Kai and Yang , Xiao-Qi}, title = {Pricing European Options on Zero-Coupon Bonds with a Fitted Finite Volume Method}, journal = {International Journal of Numerical Analysis and Modeling}, year = {2017}, volume = {14}, number = {3}, pages = {405--418}, 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.

}, issn = {2617-8710}, doi = {https://doi.org/}, url = {http://global-sci.org/intro/article_detail/ijnam/10014.html} }
TY - JOUR T1 - Pricing European Options on Zero-Coupon Bonds with a Fitted Finite Volume Method AU - Zhang , Kai AU - Yang , Xiao-Qi JO - International Journal of Numerical Analysis and Modeling VL - 3 SP - 405 EP - 418 PY - 2017 DA - 2017/06 SN - 14 DO - http://doi.org/ UR - https://global-sci.org/intro/article_detail/ijnam/10014.html KW - Option pricing, finite volume method, partial differential equation. AB -

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.

Zhang , Kai and Yang , Xiao-Qi. (2017). Pricing European Options on Zero-Coupon Bonds with a Fitted Finite Volume Method. International Journal of Numerical Analysis and Modeling. 14 (3). 405-418. doi:
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