A Comparative Study between Implicit and Crank-Nicolson Finite Difference Method for Option Pricing

Authors

  • Tanmoy Kumar Debnath Department of Business Administration, Shanto-Mariam University of Creative Technology, Dhaka-1230, Bangladesh
  • ABM Shahadat Hossain Department of Applied Mathematics, University of Dhaka, Dhaka-1000, Bangladesh

DOI:

https://doi.org/10.3329/ganit.v40i1.48192

Keywords:

European put option; Black-Scholes equation; Implicit finite difference method; Crank-Nicolson finite difference method

Abstract

In this paper, we have applied the finite difference methods (FDMs) for the valuation of European put option (EPO). We have mainly focused the application of Implicit finite difference method (IFDM) and Crank-Nicolson finite difference method (CNFDM) for option pricing. Both these techniques are used to discretized Black-Scholes (BS) partial differential equation (PDE). We have also compared the convergence of the IFDM and CNFDM to the analytic BS price of the option. This turns out a conclusion that both these techniques are fairly fruitful and excellent for option pricing.

GANIT J. Bangladesh Math. Soc.Vol. 40 (2020) 13-27

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Published

2020-07-14

How to Cite

Debnath, T. K., & Hossain, A. S. (2020). A Comparative Study between Implicit and Crank-Nicolson Finite Difference Method for Option Pricing. GANIT: Journal of Bangladesh Mathematical Society, 40(1), 13–27. https://doi.org/10.3329/ganit.v40i1.48192

Issue

Vol. 40 No. 1 (2020)

Section

Articles

License

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