A Comparative Analysis of Crank-Nicolson Scheme between Finite Volume Method and Finite Di erence Method for Pricing European Option

Authors

  • Mohammad Abul Heyath Sajib Bangamata Sheikh Fojilatunnesa Mujib Science and Technology University, Jamalpur- 2012, Bangladesh
  • A B M Shahadat Hossain University of Dhaka, Dhaka- 1000, Bangladesh
  • Sushoma Sudha University of Dhaka, Dhaka- 1000, Bangladesh

DOI:

https://doi.org/10.3329/ganit.v42i2.68017

Keywords:

European Option; Black-Scholes Model; Finite Volume Method; Finite Di erence Method; Crank- Nicolson.

Abstract

The value of European option (call and put) is evaluated in this work by discretizing the Black-Scholes (BS) equation using two numerical procedures: _nite volume method (FVM) and _nite di_erence method (FDM). Both methods can be classi_ed into three schemes: explicit, implicit, and Crank-Nicolson. The primary goal of this work is to compare the results of Crank-Nicolson FVM (CNFVM) and Crank-Nicolson FDM (CNFDM), considering the BS model as a benchmark. From the comparison, we conclude that CNFVM gives more accurate approximations than CNFDM.

GANIT J. Bangladesh Math. Soc. 42.2 (2022) 1- 13

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Published

2022-12-31

How to Cite

Heyath Sajib, M. A. ., Hossain, A. B. M. S., & Sudha, S. . (2022). A Comparative Analysis of Crank-Nicolson Scheme between Finite Volume Method and Finite Di erence Method for Pricing European Option. GANIT: Journal of Bangladesh Mathematical Society, 42(2), 1–13. https://doi.org/10.3329/ganit.v42i2.68017

Issue

Vol. 42 No. 2 (2022)

Section

Articles

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The copyright of GANIT: Journal of Bangladesh Mathematical Society is reserved by Bangladesh Mathematical Society (web: https://bdmathsociety.org/)