A hybrid finite difference scheme for pricing Asian options

Zhongdi Cen, Aimin Xu and Anbo Le

Applied Mathematics and Computation, 2015, vol. 252, issue C, 229-239

Abstract: In this paper we apply a hybrid finite difference scheme to evaluate the prices of Asian call options with fixed strike price. We use the Crank–Nicolson method to discretize the time variable and a hybrid finite difference scheme to discretize the spatial variable. The hybrid difference scheme uses the central difference approximation whenever the mesh points are sufficiently away from the left-hand side of the domain to ensure the stability of the scheme; otherwise a midpoint upwind difference scheme is used. The matrix associated with the discrete operator is an M-matrix, which ensures that the spatial discretization scheme is maximum-norm stable. It is proved that the scheme is second-order convergent with respect to both time and spatial variables. Numerical experiments support these theoretical results.

Keywords: Asian option; Partial differential equation; Central difference method; Midpoint upwind scheme; Crank–Nicolson method (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:252:y:2015:i:c:p:229-239

DOI: 10.1016/j.amc.2014.12.007

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