com.imsl.test.example.math

Class FeynmanKacEx3

java.lang.Object

com.imsl.test.example.math.FeynmanKacEx3

public class FeynmanKacEx3
extends Object

Evaluates the price of a European option with two payoff strategies.

This example evaluates the price of a European Option using two payoff strategies: Cash-or-Nothing and Vertical Spread. In the first case the payoff function is $$ p(x)=\left\{ \begin{array}{lr} 0, & x \le K \\ B, & x \gt K \end{array} \right. . $$ The value \(B\) is regarded as the bet on the asset price, see Wilmott et al. (1995, p. 39-40). The second case has the payoff function $$ p(x) = \max(x-K_1)-\max(x-K_2), \, K_2>K_1. $$ Both problems use the same boundary conditions. Each case requires a separate integration of the Black-Scholes differential equation, but only the payoff function evaluation differs in each case. The sets of parameters in the computation are:

1. Strike and bet prices \(K_1 = {10.0},\; K_2={15.0}, and B={2.0}.\)
2. Volatility \( \sigma = {0.4}\)
3. Times until expiration = {1/4, 1/2}
4. Interest rate \(r = 0.1\)
5. \( x_{\min}=0.0,\, x_{\max}=30.0\)
6. \( nx = 61, \, n=3 \times nx = 183\)

See Also:

Code, Output

Constructor Summary

Constructors

Constructor and Description
FeynmanKacEx3()

Method Summary

Modifier and Type	Method and Description
static void	main(String[] args)

Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

Constructor Detail

FeynmanKacEx3

public FeynmanKacEx3()

Method Detail

main

public static void main(String[] args)
                 throws Exception

Throws:

Exception