Higher-Order Finite Element Solutions of Option Prices

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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


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