JSE Local Volatility Finite Difference Model
11 Pages Posted: 1 Apr 2015
Date Written: November 10, 2014
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: Suggested Citation