Solution of the Black-Scholes Equation by Finite Difference Schemes

Authors

  • Ganga Ram D C Central Department of Mathematics, Tribhuvan University, Nepal
  • Kedar Nath Uprety Central Department of Mathematics, Tribhuvan University, Nepal
  • Harihar Khanal Embry-Riddle Aeronautical University, USA

Keywords:

Travel Strike Price, Expiration Time, Risk-free Interest Rate, Call, Put

Abstract

Black-Scholes (BS) equation is a popular mathematical model for determining the value of option in financial derivatives. To predict the option value during the contract of the option is a big problem. Several studies have been shown that the option price value can be determined by applying different methods. In this paper, we have discussed three finite difference methods: Explicit, Implicit and Crank-Nicolson for solving Black-Scholes equation for European call option and compared the obtained results with the exact value. It is found that the Crank-Nicolson method is more accurate and cost effective in comparison with explicit and implicit methods.

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Published

2022-08-25

How to Cite

Solution of the Black-Scholes Equation by Finite Difference Schemes. (2022). Journal of Advanced College of Engineering and Management, 7(1), 41-48. https://doi.org/10.3126/jacem.v7i01.47330

Issue

Vol. 7 No. 1 (2022)

Section

Articles

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JACEM reserves the copyright for the published papers. Author will have right to use content of the published paper in part or in full for their own work.

How to Cite

Solution of the Black-Scholes Equation by Finite Difference Schemes. (2022). Journal of Advanced College of Engineering and Management, 7(1), 41-48. https://doi.org/10.3126/jacem.v7i01.47330