Pricing Derivatives in Stochastic Volatility Models Using the Finite Difference Method

Download or read book Pricing Derivatives in Stochastic Volatility Models Using the Finite Difference Method written by and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The Heston stochastic volatility model is one extension of the Black-Scholes model which describes the money markets more accurately so that more realistic prices for derivative products are obtained. From the stochastic differential equation of the underlying financial product a partial differential equation (p.d.e.) for the value function of an option can be derived. This p.d.e. can be solved with the finite difference method (f.d.m.). The stability and consistency of the method is examined. Furthermore a boundary condition is proposed to reduce the numerical error. Finally a non uniform structured grid is derived which is fairly optimal for the numerical result in the most interesting point.