Front fixing method for solving installment option
کد مقاله : 1106-FEMATH
نویسندگان:
1علی بیرانوند *، 2کریم ایواز
1دانشجو
2عضو هیات علمی
چکیده مقاله:
In this paper we consider the European continuous installment call option on foreign currency exchange rate as underlying asset. By arbitrage pricing theory, one can model the installment option under Black-Scholes model. Therefore, non homogeneous parabolic partial differential equation governing installment option is derived. The non homogeneous term in this parabolicnpartial differential equation is the installment rate that must be paid by option holder. The pricing problem for installment optionnon foreign currency exchange rate is parabolic partial differential equation with initial an boundary conditions called free boundarynproblem. Then, to determine the value of the European installment option and the location of the stopping boundary, the frontnfixing method will be applied. In this method, we transform the free boundary problem to a nonlinear parabolic partial differentialnequation with fixed known boundary. In the next step, finite difference method will be applied to discretize the problem. Hencenone can get formula for finding the price of European continuous installment call option and the location of the stopping or freenboundary.
کلیدواژه ها:
Installment option; Black-Scholes model; Foreign currency; Front fixing method; Free boundary problem.
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