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A robust and accurate finite difference method for a generalized Black-Scholes equation. (English) Zbl 1214.91130

Summary: We present a numerical method for a generalized Black-Scholes equation, which is used for option pricing. The method is based on a central difference spatial discretization on a piecewise uniform mesh and an implicit time stepping technique. Our scheme is stable for arbitrary volatility and arbitrary interest rate, and is second-order convergent with respect to the spatial variable. Furthermore, the present paper efficiently treats the singularities of the non-smooth payoff function. Numerical results support the theoretical results.

MSC:

91G60 Numerical methods (including Monte Carlo methods)
65M06 Finite difference methods for initial value and initial-boundary value problems involving PDEs
65M12 Stability and convergence of numerical methods for initial value and initial-boundary value problems involving PDEs
65M50 Mesh generation, refinement, and adaptive methods for the numerical solution of initial value and initial-boundary value problems involving PDEs
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