Higher-Order Finite Element Solutions of Option Prices

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dc.contributor.author	Raahauge, Peter	en_US
dc.date.accessioned	2009-02-04T10:26:16Z
dc.date.available	2009-02-04T10:26:16Z
dc.date.issued	2004-09-15T00:00:00Z	en_US
dc.identifier.uri	http://hdl.handle.net/10398/7157
dc.description.abstract	Kinks and jumps in the payoff function of option contracts prevent an effective implementation of higher-order numerical approximation methods. Moreover, the derivatives (the greeks) are not easily determined around such singularities, even with standard lower-order methods. This paper suggests a transformation to turn the original ill-conditioned pricing problem into a well-behaved numerical problem. For a standard test case, both vanilla- and binary call price functions are approximated with (tensor) B-splines of up to 10’th order. Polynomial convergence rates of orders up to approximately 10 are obtained for prices as well as for first and second order derivatives (delta and gamma). Unlike similar studies, numerical approximation errors are measured both as weighted averages and in the supnorm over a state space including time-to-maturities down to a split second. KEYWORDS: Numerical option pricing, Transformed state spaces, Higher-order B-splines.	en_US
dc.format.extent	43 s.	en_US
dc.language	eng	en_US
dc.relation.ispartofseries	Working paper;2004-005	en_US
dc.subject.other	kep	en_US
dc.title	Higher-Order Finite Element Solutions of Option Prices	en_US
dc.type	wp	en_US
dc.accessionstatus	modt04sep15 miel	en_US
dc.contributor.corporation	Copenhagen Business School. CBS	en_US
dc.contributor.department	Institut for Finansiering	en_US
dc.contributor.departmentshort	FI	en_US
dc.contributor.departmentuk	Department of Finance	en_US
dc.contributor.departmentukshort	DF	en_US
dc.idnumber	x656444141	en_US
dc.publisher.city	København	en_US
dc.publisher.year	2004	en_US