A Discontinuous Galerkin Method for Pricing American Options Under the Constant Elasticity of Variance Model

David P. Nicholls, Andrew Sward
2015 Communications in Computational Physics  
AbstractThe pricing of option contracts is one of the classical problems in Mathematical Finance. While useful exact solution formulas exist for simple contracts, typically numerical simulations are mandated due to the fact that standard features, such as early-exercise, preclude the existence of such solutions. In this paper we consider derivatives which generalize the classical Black-Scholes setting by not only admitting the early-exercise feature, but also considering assets which evolve by
more » ... he Constant Elasticity of Variance (CEV) process (which includes the Geometric Brownian Motion of Black-Scholes as a special case). In this paper we investigate a Discontinuous Galerkin method for valuing European and American options on assets evolving under the CEV process which has a number of advantages over existing approaches including adaptability, accuracy, and ease of parallelization.
doi:10.4208/cicp.190513.131114a fatcat:tblhhtd2j5cy3p63l3uygmvdxq