Meshfree Approximation for Multi-Asset Options
ICMA Centre Discussion Papers in Finance DP2009-07
22 Pages Posted: 28 Jun 2009
Date Written: June 24, 2009
We price multi-asset options by solving their price partial differential equations using a meshfree approach with radial basis functions under jump-diffusion and geometric Brownian motion frameworks. In the geometric Brownian motion framework, we propose an effective technique that breaks the multi-dimensional problem to multiple 3D problems. We solve the price PDEs or PIDEs with an implicit meshfree scheme using thin-plate radial basis functions. Meshfree approach is very accurate, has high order of convergence and is easily scalable and adaptable to higher dimensions and different payoff profiles. We also obtain closed form approximations for the option Greeks. We test the model on American crack spread options traded on NYMEX.
Keywords: multi-asset options, radial basis function, meshfree approximation, collocation, multi-dimensional Levy process, basket options, PIDE, PDE
JEL Classification: C02, C3, G63
Suggested Citation: Suggested Citation
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By Minqiang Li