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ISSN : 1226-0657

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Vol.28 No.4

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Efficient and Accurate Finite Difference Method for the Four Underlying Asset ELS

Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics / Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, (P)1226-0657; (E)2287-6081
2021, v.28 no.4, pp.329-341
https://doi.org/https://doi.org/10.7468/jksmeb.2021.28.4.329
Hwang, Hyeongseok
Choi, Yongho
Kwak, Soobin
Hwang, Youngjin
Kim, Sangkwon
Kim, Junseok
Hwang,, H. , Choi,, Y. , Kwak,, S. , Hwang,, Y. , Kim,, S. , & Kim,, J. (2021). Efficient and Accurate Finite Difference Method for the Four Underlying Asset ELS. Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics, 28(4), 329-341, https://doi.org/https://doi.org/10.7468/jksmeb.2021.28.4.329

Abstract

In this study, we consider an efficient and accurate finite difference method for the four underlying asset equity-linked securities (ELS). The numerical method is based on the operator splitting method with non-uniform grids for the underlying assets. Even though the numerical scheme is implicit, we solve the system of discrete equations in explicit manner using the Thomas algorithm for the tri-diagonal matrix resulting from the system of discrete equations. Therefore, we can use a relatively large time step and the computation of the ELS option pricing is fast. We perform characteristic computational test. The numerical test confirm the usefulness of the proposed method for pricing the four underlying asset equity-linked securities.

keywords
four underlying asset ELS, equity-linked securities, Black-Scholes equation, finite difference scheme

Journal of the Korean Society of Mathematical Education Series B: The Pure and Applied Mathematics

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