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Time domain decomposition for European options in financial modelling

Time domain decomposition for European options in financial modelling

Crann, Diane, Davies, Alan, Lai, Choi-Hong and Leong, Swee (1998) Time domain decomposition for European options in financial modelling. In: Contemporary Mathematics: Domain Decomposition Methods 10. American Mathematical Society, Providence, RI, USA, pp. 486-491. ISBN 978-0-8218-0988-4 (doi:10.1090/conm/218)

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Finance is one of the fastest growing areas in modern applied mathematics with real world applications. The interest of this branch of applied mathematics is best described by an example involving shares. Shareholders of a company receive dividends which come from the profit made by the company. The proceeds of the company, once it is taken over or wound up, will also be distributed to shareholders. Therefore shares have a value that reflects the views of investors about the likely dividend payments and capital growth of the company. Obviously such value will be quantified by the share price on stock exchanges. Therefore financial modelling serves to understand the correlations between asset and movements of buy/sell in order to reduce risk. Such activities depend on financial analysis tools being available to the trader with which he can make rapid and systematic evaluation of buy/sell contracts. There are other financial activities and it is not an intention of this paper to discuss all of these activities. The main concern of this paper is to propose a parallel algorithm for the numerical solution of an European option. This paper is organised as follows. First, a brief introduction is given of a simple mathematical model for European options and possible numerical schemes of solving such mathematical model. Second, Laplace transform is applied to the mathematical model which leads to a set of parametric equations where solutions of different parametric equations may be found concurrently. Numerical inverse Laplace transform is done by means of an inversion algorithm developed by Stehfast. The scalability of the algorithm in a distributed environment is demonstrated. Third, a performance analysis of the present algorithm is compared with a spatial domain decomposition developed particularly for time-dependent heat equation. Finally, a number of issues are discussed and future work suggested.

Item Type: Conference Proceedings
Title of Proceedings: Contemporary Mathematics: Domain Decomposition Methods 10
Additional Information: Presented at Tenth International Conference on Domain Decomposition Methods, 10-14 August 1997, Boulder, CO, USA.
Pre-2014 Departments: School of Computing & Mathematical Sciences
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Last Modified: 14 Oct 2016 08:59
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None

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