Abstract
We present a large class of nonlinear models of European options as parabolic equations with quasi-linear diffusion and fully nonlinear hyperbolic part. The main idea of the operator splitting method (OSM) is to couple known difference schemes for nonlinear hyperbolic equations with other ones for quasi-linear parabolic equations. We use flux limiter techniques, explicit–implicit difference schemes, Richardson extrapolation, etc. Theoretical analysis for illiquid market model is given. The numerical experiments show second-order accuracy for the numerical solution (the price) and Greeks Delta and Gamma, positivity and monotonicity preserving properties of the approximations.
Acknowledgements
This research was supported by the European Union under Grant Agreement number 304617 (FP7 Marie Curie Action Project Multi-ITN STRIKE – Novel Methods in Computational Finance) and Bulgarian National Fund of Science under Project DID 02/37-2009.