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Stencil Study for RBF-FD in Option Pricing
Uppsala University, Disciplinary Domain of Science and Technology, Technology, Department of Engineering Sciences.
2016 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

This thesis contains results on convergence studies for different stencils of radial basis function generated finite difference (RBF-FD) method applied to solving Black-Scholes equation for pricing European call options. The results experimentally confirm the theoretical convergence rates for smooth payoff functions with stencils of size 3, 5 and 7 in one- dimensional problems, and 9, 13 and 25 in two- dimensional problems. Moreover, it is shown how different terms in the equation can be approximated individually using the proposed method and then combined into a discrete approximation of the entire spatial differential operator. This new version of the RBF-FD method, where each term has been

approximated individually, has been compared to the classical method and the outcome did not show any significant performance advantages. Nevertheless, the results also showed that the second order derivative was the hardest one to approximate accurately and this poses an important finding for the future development of the method. 

Place, publisher, year, edition, pages
2016. , 21 p.
TVE, TVe 16 051 juni
Keyword [en]
RBF-FD, Option pricing
National Category
Engineering and Technology Other Computer and Information Science
URN: urn:nbn:se:uu:diva-300223OAI: oai:DiVA.org:uu-300223DiVA: diva2:951139
Educational program
Master Programme in Engineering Physics
Available from: 2016-08-17 Created: 2016-08-06 Last updated: 2016-08-17Bibliographically approved

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