10.1186/2251-7456-6-72

Numerical pricing of financial derivatives using Jain’s high-order compact scheme

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  • Nawdha Thakoor*1,
  • Yannick Tangman1,
  • Muddun Bhuruth1,
  1. Department of Mathematics, University of Mauritius, Reduit, MU
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Published in Issue 2012-12-17

How to Cite

Thakoor, N., Tangman, Y., & Bhuruth, M. (2012). Numerical pricing of financial derivatives using Jain’s high-order compact scheme. Mathematical Sciences, 6(1). https://doi.org/10.1186/2251-7456-6-72
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Abstract

Abstract Purpose This paper develops new fast and accurate computational schemes for pricing European and American bond options under generalised Chan-Karoyli-Longstaff-Sanders term structure models. Methods We use high-order compact discretisations of the pricing equations and an operator splitting method for American options. Results Highly accurate numerical solutions can be computed using relatively coarse grid sizes and numerical solutions exhibiting fourth-order convergence are obtained for bond and bond option prices. The scheme is also stable and efficient for pricing financial problems with time dependent parameters. Conclusions The new schemes are efficient alternatives to schemes based on the Crank-Nicolson discretisation for the pricing of interest rate derivatives.

Keywords

  • Interest rate models,
  • American options,
  • High-order discretisations,
  • Operator splitting methods,
  • Black-Scholes equation
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