Solving partial differential equations related to option pricing with numerical methods
Coen Leentvaar

Site of the project:
TU Delft

start of the project: January 2003

The Master project has been finished in December 2003 ( Masters Thesis). For working address etc. we refer to our alumnipage.

Summary of the master project:
Options are widely used on markets and exchanges. The famous Black-Scholes model is a convenient way to calculate the price of an option. In this thesis a highly accurate numerical method for solving this equation is presented. Although the exact solution of the Black-Scholes equation is known, a numerical method will be proposed. A reason is to create a general numerical model for many different types of options. In particular, American options are not solvable in an analytic sense. If the numerical method works for European style option, then this is the basis to get the solution for an American option. Another issue is ``implied volatility''. Volatility is a quantitative expression for the randomness in the market. From newspapers or stock exchanges, the volatility of asset prices in the future is not known, so it has to be estimated. If we have a value for the option price, it is possible to calculate the volatility, which is the only unknown parameter in the Black-Scholes equation. The main questions dealt with in this thesis are:

Contact information: Kees Vuik

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