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Method of Lines for Valuation and Sensitivities of Bermudan Options

Banerjee, P and Murthy, V and Jain, S (2022) Method of Lines for Valuation and Sensitivities of Bermudan Options. In: Computational Economics .

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Official URL: https://doi.org/10.1007/s10614-022-10339-2


In this paper, we present a computationally efficient technique based on the Method of Lines for the approximation of the Bermudan option values via the associated partial differential equations. The method of lines converts the Black Scholes partial differential equation to a system of ordinary differential equations. The solution of the system of ordinary differential equations so obtained only requires spatial discretization and avoids discretization in time. Additionally, the exact solution of the ordinary differential equations can be obtained efficiently using the exponential matrix operation, making the method computationally attractive and straightforward to implement. An essential advantage of the proposed approach is that the associated Greeks can be computed with minimal additional computations. We illustrate, through numerical experiments, the efficacy of the proposed method in pricing and computation of the sensitivities for a European call, cash-or-nothing, powered option, and Bermudan put option.

Item Type: Journal Article
Publication: Computational Economics
Publisher: Springer
Additional Information: The copyright for this article belongs to Springer.
Department/Centre: Division of Interdisciplinary Sciences > Management Studies
Division of Physical & Mathematical Sciences > Mathematics
Date Deposited: 04 Jan 2023 05:34
Last Modified: 04 Jan 2023 05:34
URI: https://eprints.iisc.ac.in/id/eprint/78701

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