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SECTION B

A meshless method for Asian style options pricing under the Merton jump-diffusion model

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Pages 2498-2514 | Received 01 Jan 2015, Accepted 13 May 2015, Published online: 07 Sep 2015
 

Abstract

In this paper, we consider the partial integro-differential equation arising when a stock follows a Poisson distributed jump process, for the pricing of Asian options. We make use of the meshless radial basis functions with differential quadrature for approximating the spatial derivatives and demonstrate that the algorithm performs effectively well as compared to the commonly employed finite difference approximations. We also employ Strang splitting with the exponential time integration technique to improve temporal efficiency. Throughout the numerical experiments covered in the paper, we show how the proposed scheme can be efficiently employed for the pricing of American style Asian options under both the Black–Scholes and the Merton jump-diffusion models.

2010 AMS Subject Classifications:

Disclosure statement

No potential conflict of interest was reported by the authors.

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