Numerical Solution of Pricing of European Put Option with Stochastic Volatility
Maya Institute of Technology and Management
October 10, 2010
International Journal of Engineering, Vol. 24, No. 2, pp. 189-203, 2011
In this paper, European put option pricing with stochastic volatility forecasted by well known GARCH model is discussed in context of Indian financial market. The data of Reliance Ltd. stock price from 3/01/2000 to 30/03/2009 is used and resulting partial differential equation is solved by Crank-Nicolson finite difference method for various interest rate and maturity in time. The sensitivity measures "Greeks" are also determined to validate the model. This is observed that the value of European put option increases with maturity time and decreases with interest rate.
Keywords: European Option, Finite Difference Method, Stochastic Volatility, GARCH(1,1), Greeks
JEL Classification: C63, E47, G12Accepted Paper Series
Date posted: October 10, 2011
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