An Eulerian-Lagrangian method for option pricing in finance

Wang Zheng, Mohamed Al-Lawatia, Wang Hong

Research output: Contribution to journalArticle

Abstract

This article is devoted to the development and application of an Eulerian-Lagrangian method (ELM) for the solution of the Black-Scholes partial differential equation for the valuation of European option contracts. This method fully utilizes the transient behavior of the governing equations and generates very accurate option's fair values and their derivatives also known as option Greeks, even if coarse spatial grids and large time steps are used. Numerical experiments on two standard option contracts are presented which show that the ELM method (favorably) compares in terms of accuracy and efficiency to many other well-perceived methods.

Original languageEnglish
Pages (from-to)293-329
Number of pages37
JournalNumerical Methods for Partial Differential Equations
Volume23
Issue number2
DOIs
Publication statusPublished - Mar 2007

Fingerprint

Eulerian-Lagrangian Methods
Option Pricing
Finance
Partial differential equations
Costs
European Options
Black-Scholes
Transient Behavior
Derivatives
Valuation
Governing equation
Partial differential equation
Numerical Experiment
Grid
Derivative
Experiments

Keywords

  • Black-Scholes equations
  • Efficient simulation of option pricing
  • Eulerian-Lagrangian methods
  • Financial mathematics
  • Mathematical finance
  • Option-pricing

ASJC Scopus subject areas

  • Applied Mathematics
  • Analysis
  • Computational Mathematics

Cite this

An Eulerian-Lagrangian method for option pricing in finance. / Zheng, Wang; Al-Lawatia, Mohamed; Hong, Wang.

In: Numerical Methods for Partial Differential Equations, Vol. 23, No. 2, 03.2007, p. 293-329.

Research output: Contribution to journalArticle

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