JSE Local Volatility Finite Difference Model

11 Pages Posted: 1 Apr 2015

See all articles by Rudolf Oosthuizen

Rudolf Oosthuizen

JSE Securities Exchange

Antonie Kotze

Financial Chaos Theory; Department of Finance and Investment Management

Date Written: November 10, 2014

Abstract

The use of finite difference methods for solving PDEs on a computer goes back almost to the 1950s since its invention. In finance, these methods were introduced in the 1970’s after the derivation of the Black-Scholes model. The sophistication of these methods in finance has become a field of extensive research. These include, alternating finite difference (ADI) methods, adaptive grids, grids stretching and compact finite differences, to name but a few. The interested reader is referred to two important textbooks in literature that cover financial derivatives pricing with finite difference methods exclusively.

The purpose of this document is to provide a base for the valuation methods used in the Can-Do product space. Thus we will not be re-documenting already well documented models and methodologies. This document will rather focus on the application of these methods to the JSE can-do products.

Keywords: Finite difference, exotic options, local volatility, option pricing, JSE, Can-Do options, PDE

JEL Classification: C61, G13, G17

Suggested Citation

Oosthuizen, Rudolf and Kotze, Antonie, JSE Local Volatility Finite Difference Model (November 10, 2014). Available at SSRN: https://ssrn.com/abstract=2587379 or http://dx.doi.org/10.2139/ssrn.2587379

Rudolf Oosthuizen

JSE Securities Exchange ( email )

United States

HOME PAGE: http://www.jse.co.za

Antonie Kotze (Contact Author)

Financial Chaos Theory ( email )

PO Box 16185
Doornfontein, 2028
South Africa

HOME PAGE: http://www.quantonline.co.za/

Department of Finance and Investment Management ( email )

PO Box 524
Auckland Park
Johannesburg, Gauteng 2006
South Africa

HOME PAGE: http://www.uj.ac.za

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