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Journal of Applied Mathematics and Computation

ISSN Print: 2576-0645 Downloads: 157530 Total View: 1867564
Frequency: quarterly ISSN Online: 2576-0653 CODEN: JAMCEZ
Email: jamc@hillpublisher.com
Article Open Access http://dx.doi.org/10.26855/jamc.2022.12.009

Estimating Option Prices with Discrete Dividend Payment Using Finite Difference Method and Monte Carlo Simulation: A Comparative Study

Md Joshem Uddin1,3,*, Md. Shakil Hossain2, Md. Arif Hossain1, Sharana Parvin1, Adiba Rahman1, Md. Mehedi Hasan Sohel1

1Department of Applied Mathematics, University of Dhaka, Dhaka-1000, Bangladesh.

2Department of Mathematics, Khulna University of Engineering & Technology, Khulna-9203, Bangladesh.

3Department of Mathematical Sciences, The University of Texas at Dallas, Richardson, TX 75080, USA.

*Corresponding author: Md Joshem Uddin

Published: December 21,2022

Abstract

Valuation of the option prices through numerical methods and real option valuation has had a significant influence on the way the traders price the financial derivatives over the past years. The Black-Scholes (BS) model is an essential model that plays an important role in pricing option prices. In this paper, the numerical solution of the Black-Scholes model for pricing European call options with discrete dividend payment using the Monte Carlo (MC) and Finite-Difference Method (FDM) has been presented. The explicit, implicit, and Crank Nicolson finite difference schemes have been used in this study. All of these approaches, including MC Simulation, are applied to the same example to assess their efficiency. The results obtained using these methods have been compared to the option values derived using the option pricing formula. Numerical results reveal that the Crank Nicolson Finite Difference Scheme (CNFDS) converges faster and offers more accurate results than the other two Finite Difference Schemes (FDSs) and the MC simulation.

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How to cite this paper

Estimating Option Prices with Discrete Dividend Payment Using Finite Difference Method and Monte Carlo Simulation: A Comparative Study

How to cite this paper:  Md Joshem Uddin, Md. Shakil Hossain, Md. Arif Hossain, Sharana Parvin, Adiba Rahman, Md. Mehedi Hasan Sohel. (2022) Estimating Option Prices with Discrete Dividend Payment Using Finite Difference Method and Monte Carlo Simulation: A Comparative Study. Journal of Applied Mathematics and Computation6(4), 472-481.

DOI: http://dx.doi.org/10.26855/jamc.2022.12.009