IJPAM: Volume 28, No. 3 (2006)

FINITE DIFFERENCE AND ELEMENT METHODS FOR
PRICING OPTIONS WITH STOCHASTIC VOLATILITY

Vasile L. Lazar
``Vasile Goldis" Western University
Mihai Viteazul Str., No. 26,
Satu Mare, 440030, ROMANIA
e-mail: vasilazar@yahoo.com


Abstract.Solving partial differential equations by standard numerical methods as finite difference and element methods is possible for a wide range of option models. We concentrate on stochastic volatility models where as the name suggests the volatility is not constant like in the Black-Scholes model, Black and Scholes [#!bs!#], but it is a stochastic process itself. We take the example of Heston's model (see Heston [#!h!#]), to illustrate how to use this numerical methods.

Received: April 3, 2006

AMS Subject Classification: 49M25

Key Words and Phrases: option pricing, stochastic volatility, partial differential equations

Source: International Journal of Pure and Applied Mathematics
ISSN: 1311-8080
Year: 2006
Volume: 28
Issue: 3