A family of positivity preserving schemes for numerical solution of Black–Scholes equation

M. Mehdizadeh Khalsaraei and R. Shokri Jahandizi ()
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M. Mehdizadeh Khalsaraei: Department of Mathematics, Faculty of Science, University of Maragheh, Maragheh, Iran
R. Shokri Jahandizi: Department of Mathematics, Faculty of Science, University of Maragheh, Maragheh, Iran

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 04, 1-8

Abstract: When one solves the Black–Scholes partial differential equation, it is of great important that numerical scheme to be free of spurious oscillations and satisfy the positivity requirement. With positivity, we mean, the component non-negativity of the initial vector, is preserved in time for the exact solution. Numerically, such property for fully implicit scheme is not always satisfied by approximated solutions and they generate spurious oscillations in the presence of discontinuous payoff. In this paper, by using the nonstandard discretization strategy, we propose a new scheme that is free of spurious oscillations and satisfies the positivity requirement.

Keywords: Finite differences; M-matrix; Black–Scholes equation; positivity preserving; nonstandard discretization (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S2424786316500250

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