Pricing European Options on Zero-Coupon Bonds with a Fitted Finite Volume Method.

Volume 14, Issue 3

Kai Zhang & Xiao Qi Yang

DOI:

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

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