A Fitted L-Multi-Point Flux Approximation Method for Pricing Options

Rock Stephane Koffi () and Antoine Tambue ()
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Rock Stephane Koffi: University of Cape Town
Antoine Tambue: Western Norway University of Applied Sciences

Computational Economics, 2022, vol. 60, issue 2, No 9, 633-663

Abstract: Abstract In this paper, we introduce a special kind of finite volume method called Multi-Point Flux Approximation method (MPFA) to price European and American options in two dimensional domain. We focus on the L-MPFA method for space discretization of the diffusion term of Black–Scholes operator. The degeneracy of the Black-Scholes operator is tackled using the fitted finite volume method. This combination of fitted finite volume method and L-MPFA method coupled to upwind methods gives us a novel scheme, called the fitted L-MPFA method. Numerical experiments show the accuracy of the novel fitted L-MPFA method comparing to well known schemes for pricing options.

Keywords: Finite volume methods; L Multi-Point Flux Approximation; Degenerated PDEs; Option pricing; 65M08; 68W25; 65C20 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10614-021-10161-2

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