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

DOI:

https://doi.org/10.3126/jacem.v7i01.47330

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

D C, G. R., Uprety, K. N., & Khanal, H. (2022). Solution of the Black-Scholes Equation by Finite Difference Schemes. 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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