Numerical Solution of Pricing of European Put Option with Stochastic Volatility

, Asad  Ahmad

Abstract

Numerical Solution of Pricing of European Put Option with Stochastic Volatility

Asad Ahmad

Maya Institute of Technology and Management

October 10, 2010

International Journal of Engineering, Vol. 24, No. 2, pp. 189-203, 2011

Abstract:
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, G12

Accepted Paper Series

Date posted: October 10, 2011

Suggested Citation

Ahmad, Asad Ahmad, Numerical Solution of Pricing of European Put Option with Stochastic Volatility (October 10, 2010). International Journal of Engineering, Vol. 24, No. 2, pp. 189-203, 2011. Available at SSRN: http://ssrn.com/abstract=1941679

Contact Information

Asad Ahmad (Contact Author)

Maya Institute of Technology and Management ( email )

SealaQui
Dehradun, Uttrakhand 248001
India