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A Fitted Multi-point Flux Approximation Method for Pricing Two Options

Abstract

In this paper, we develop novel numerical methods based on the multi-point flux approximation (MPFA) method to solve the degenerated partial differential equation (PDE) arising from pricing two-assets options. The standard MPFA is used as our first method and is coupled with a fitted finite volume in our second method to handle the degeneracy of the PDE and the corresponding scheme is called fitted MPFA method. The convection part is discretized using the upwinding methods (first and second order) that we have derived on non uniform grids. The time discretization is performed with \(\theta \)-Euler methods. Numerical simulations show that our new schemes can be more accurate than the current fitted finite volume method proposed in the literature.

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Notes

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    center of the control volume \(\mathcal {C}_{i,j}\).

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Acknowledgements

This work was supported by the Robert Bosch Stiftung through the AIMS ARETE Chair programme (Grant No 11.5.8040.0033.0).

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Correspondence to Antoine Tambue.

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Koffi, R.S., Tambue, A. A Fitted Multi-point Flux Approximation Method for Pricing Two Options. Comput Econ (2019). https://doi.org/10.1007/s10614-019-09906-x

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Keywords

  • Finite volume methods
  • Multi-point flux approximation
  • Degenerated PDEs
  • Options pricing
  • Multi-asset options