Tradable Schemes

Centrum voor Wiskunde en Informatica, MAS WP No. R0024

12 Pages Posted: 12 Oct 2000

See all articles by Jiri Hoogland

Jiri Hoogland

Centrum voor Wiskunde en Informatica (CWI)

Dimitri Neumann

Centrum voor Wiskunde en Informatica (CWI)

Date Written: September 3, 2000

Abstract

In this article we present a new approach to the numerical valuation of derivative securities. The method is based on our previous work where we formulated the theory of pricing in terms of tradables. The basic idea is to fit a finite difference scheme to exact solutions of the pricing PDE. This can be done in a very elegant way, due to the fact that in our tradable based formulation there appear no drift terms in the PDE. We construct a mixed scheme based on this idea and apply it to price various types of arithmetic Asian options, as well as plain vanilla options (both european and american style) on stocks paying known cash dividends. We find prices which are accurate to ~0.1% in about 10ms on a Pentium 233MHz computer and to ~0.001% in a second. The scheme can also be used for market conform pricing, by fitting it to observed option prices.

JEL Classification: C63, G13

Suggested Citation

Hoogland, Jiri and Neumann, Dimitri, Tradable Schemes (September 3, 2000). Centrum voor Wiskunde en Informatica, MAS WP No. R0024. Available at SSRN: https://ssrn.com/abstract=241128 or http://dx.doi.org/10.2139/ssrn.241128

Jiri Hoogland

Centrum voor Wiskunde en Informatica (CWI) ( email )

P.O.Box 94079
MAS
NL-1090 GB Amsterdam
Netherlands
+31(20)5924102 (Phone)
+31(20)5924199 (Fax)

Dimitri Neumann (Contact Author)

Centrum voor Wiskunde en Informatica (CWI) ( email )

P.O.Box 94079
MAS
NL-1090 GB Amsterdam
Netherlands
+31(20)5924102 (Phone)
+31(20)5924199 (Fax)

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