Radial-basis-function-based finite difference operator splitting method for pricing American options |
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| Authors: | Mohan K. Kadalbajoo Lok Pati Tripathi |
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| Affiliation: | 1. Department of Mathematics, LNM Institute of Information Technology, Jaipur, India;2. Department of Mathematics and Statistics, Indian Institute of Technology Kanpur, Kanpur, India |
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| Abstract: | We present a new radial-basis-function (RBF)-based numerical method for pricing European and American option problems. The governing equation is time semi-discretized by a linear-implicit backward difference method. The spatial discretization is done by using the RBF-based finite difference method. The numerical scheme first derived for an European option is extended for American options by using an operator splitting method. Numerical experiments with multiquadric RBF for one- and two-asset option problems are carried out, and the results obtained are compared with the existing ones. |
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| Keywords: | Radial basis function finite difference American option option pricing operator splitting method |
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