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A Fitted L-Multi-Point Flux Approximation Method for Pricing Options

Author

Listed:
  • Rock Stephane Koffi

    (University of Cape Town)

  • Antoine Tambue

    (Western Norway University of Applied Sciences)

Abstract

In this paper, we introduce a special kind of finite volume method called Multi-Point Flux Approximation method (MPFA) to price European and American options in two dimensional domain. We focus on the L-MPFA method for space discretization of the diffusion term of Black–Scholes operator. The degeneracy of the Black-Scholes operator is tackled using the fitted finite volume method. This combination of fitted finite volume method and L-MPFA method coupled to upwind methods gives us a novel scheme, called the fitted L-MPFA method. Numerical experiments show the accuracy of the novel fitted L-MPFA method comparing to well known schemes for pricing options.

Suggested Citation

  • Rock Stephane Koffi & Antoine Tambue, 2022. "A Fitted L-Multi-Point Flux Approximation Method for Pricing Options," Computational Economics, Springer;Society for Computational Economics, vol. 60(2), pages 633-663, August.
    • Handle: RePEc:kap:compec:v:60:y:2022:i:2:d:10.1007_s10614-021-10161-2
    DOI: 10.1007/s10614-021-10161-2
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    References listed on IDEAS

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    1. S. Wang & X. Q. Yang & K. L. Teo, 2006. "Power Penalty Method for a Linear Complementarity Problem Arising from American Option Valuation," Journal of Optimization Theory and Applications, Springer, vol. 129(2), pages 227-254, May.
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