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    HW 11

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    api-289357184
    This document contains MATLAB code for pricing European call options using explicit and implicit finite difference methods. It includes functions to calculate the option price on a grid over stock prices and times to maturity. The code compares the finite difference prices to prices from the Black-Scholes formula using different grid sizes. Graphs of the option value over the stock price and time grids are also generated.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    HW 11

    Uploaded by

    api-289357184
    32 views17 pages
    This document contains MATLAB code for pricing European call options using explicit and implicit finite difference methods. It includes functions to calculate the option price on a grid over stock prices and times to maturity. The code compares the finite difference prices to prices from the Black-Scholes formula using different grid sizes. Graphs of the option value over the stock price and time grids are also generated.

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    103071509 hw11

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    This document contains MATLAB code for pricing European call options using explicit and implicit finite difference methods. It includes functions to calculate the option price on a grid over stock prices and times to maturity. The code compares the finite difference prices to prices from the Black-Scholes formula using different grid sizes. Graphs of the option value over the stock price and time grids are also generated.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    32 views17 pages

    HW 11

    Uploaded by

    api-289357184
    This document contains MATLAB code for pricing European call options using explicit and implicit finite difference methods. It includes functions to calculate the option price on a grid over stock prices and times to maturity. The code compares the finite difference prices to prices from the Black-Scholes formula using different grid sizes. Graphs of the option value over the stock price and time grids are also generated.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 17

    Homework11

    103071509


    SIGN
    function [ payoff, lattice ] = SIGN_bit( S0, K, r, T, sigma, N )
    deltaT = T/N;
    u = exp( sigma * sqrt(deltaT) );
    d = 1/u;
    p = ( exp( r * deltaT ) - d ) / ( u - d );
    for i = 0 : N
    P = S0 * u^(N-i) * d^(i);
    S(i+1) = 10;
    if P > K
    S(i+1) = 10 * (1+(P-K)/K);
    end
    end
    for i = N : -1 : 1
    for j = 0 : i-1
    S(j+1) = max(10, exp(-r*deltaT) * ( S(j+1)*p + S(j+2)*(1-p) ) );
    end
    lattice(1:i,i) = S(1:i);
    end
    payoff = S(1);
    end

    %CompSIGN
    S = 400;
    K = 336.69;
    r = 0.1;
    sigma = 0.2;
    T = 1;
    N = 5000;
    for i = 1:200
    bit(i) = SIGN_bit(i+300,K,r,sigma,T,N);
    end
    plot(301:500,bit)
    for i = 1:200
    bit(i) = SIGN_bit(S,i+300,r,sigma,T,N);
    end
    plot(301:500,bit)


    European Call (Explicit)
    % EuCallExpl1.m
    function price =
    EuCallExpl1(S0,X,r,T,sigma,Smax,dS,dt)
    % set up grid and adjust increments if
    necessary
    M = round(Smax/dS);
    dS = Smax/M;
    N = round(T/dt);
    dt = T/N;
    matval = zeros(M+1,N+1);
    vetS = linspace(0,Smax,M+1)';
    vetj = 0:N;
    veti = 0:M;
    % set up boundary conditions
    matval(:,N+1) = max(vetS-X,0);
    matval(1,:) =0;
    matval(M+1,:) = Smax-X*exp(-r*dt*(N-vetj));
    % set up coefficients
    a = 0.5*dt*(sigma^2*veti - r).*veti;
    b = 1- dt*(sigma^2*veti.^2 + r);
    c = 0.5*dt*(sigma^2*veti + r).*veti;

    % solve backward in time


    for j=N:-1:1
    for i=2:M
    matval(i,j) = a(i)*matval(i-1,j+1) +
    b(i)*matval(i,j+1)+ ...
    c(i)*matval(i+1,j+1);
    end
    End
    % find closest point to S0 on the grid and return price
    % possibly with a linear interpolation
    idown = floor(S0/dS);
    iup = ceil(S0/dS);
    if idown == iup
    price = matval(idown+1,1);
    else
    price = matval(idown+1,1) + ...
    (S0 -(idown+1)*dS)*(matval(iup+1,1) matval(iup,1))/dS;
    end

    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma1=0.4;
    sigma2=0.3;
    Smax=100;
    dS1=2;
    dS2=1.5;
    dS3=1;
    dT=5/1200;
    [c01,p04]=blsprice(S0,X,r,T,sigma1);
    Exps01=EuCallExpl1(S0,X,r,T,sigma1,Smax,dS1,dT);
    [c02,p03]=blsprice(S0,X,r,T,sigma2);
    Exps02dS2=EuCallExpl1(S0,X,r,T,sigma2,Smax,dS1,dT);
    ExpdS15=EuCallExpl1(S0,X,r,T,sigma2,Smax,dS2,dT);
    ExpdS1=EuCallExpl1(S0,X,r,T,sigma2,Smax,dS3,dT);
    c01
    Exps01
    c02
    Exps02dS2
    ExpdS15
    ExpdS1

    c01 =
    6.1165
    Exps01 =
    -3.5813e+04
    c02 =
    4.8851
    Exps02dS2 =
    4.8697
    ExpdS15 =
    252.2526

    % CompExpl3D.m Compare blsprice and BlsHalton


    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.3;
    Smax=100;
    dS=2;
    dt=5/1200;
    [ExpdS1,matval,vetS,vetT]=EuCallExplall(S0,X,r,T,sigma,Smax,dS,dt);
    matval
    ExpdS1
    mesh(vetT,vetS,matval);
    ylabel('Stock price'); xlabel('Time'); title('European Call Option,
    Explicit Method');

    % CompExpl3D.m Compare blsprice and BlsHalton


    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.3;
    Smax=100;
    dS=1;
    dt=5/1200;
    [ExpdS1,matval,vetS,vetT]=EuCallExplall(S0,X,r,T,sigma,Smax,dS,dt);
    matval
    ExpdS1
    mesh(vetT,vetS,matval);
    ylabel('Stock price'); xlabel('Time'); title('European Call Option, Explicit
    Method');


    European Call (Implicit)
    % EuCallImpl.m
    function price =
    EuCallImpl(S0,X,r,T,sigma,Smax,dS,dt)
    % set up grid and adjust increments if necessary
    M = round(Smax/dS);
    dS = Smax/M;
    N = round(T/dt);
    dt = T/N;
    matval = zeros(M+1,N+1);
    vetS = linspace(0,Smax,M+1)';
    vetj = 0:N;
    veti = 0:M;
    % set up boundary conditions
    matval(:,N+1) = max(vetS-X,0);
    matval(1,:) = 0;
    matval(M+1,:) =Smax-X*exp(-r*dt*(N-vetj));
    % set up the tridiagonal coefficients matrix
    a = 0.5*(r*dt*veti-sigma^2*dt*(veti.^2));
    b = 1+sigma^2*dt*(veti.^2)+r*dt;
    c = -0.5*(r*dt*veti+sigma^2*dt*(veti.^2));

    coeff = diag(a(3:M),-1) + diag(b(2:M)) +


    diag(c(2:M-1),1);
    [L,U] = lu(coeff);
    % solve the sequence of linear systems
    aux = zeros(M-1,1);
    for j=N:-1:1
    aux(1) = - a(2) * matval(1,j);
    %matval(2:M,j) = U \ (L \ (matval(2:M,j+1) +
    aux));
    matval(2:M,j) = coeff \ (matval(2:M,j+1) + aux);
    end
    % find closest point to S0 on the grid and return
    price
    % possibly with a linear interpolation
    idown = floor(S0/dS);
    iup = ceil(S0/dS);
    if idown == iup
    price = matval(idown+1,1);
    else
    price = matval(idown+1,1) + ...
    (S0 - idown*dS)*(matval(idown+2,1) matval(idown+1,1))/dS;
    end

    % CompBlsImpl.m Compare blsprice and


    BlsHalton

    % CompBlsImpl.m Compare blsprice and


    BlsHalton

    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.4;
    Smax=100;
    dS=2;
    dT=5/2400;
    [c,p]=blsprice(S0,X,r,T,sigma);
    Impl=EuCallImpl(S0,X,r,T,sigma,Smax,dS,dT);

    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.4;
    Smax=100;
    dS=0.5;
    dT=5/2400;
    [c,p]=blsprice(S0,X,r,T,sigma);
    Impl=EuCallImpl(S0,X,r,T,sigma,Smax,dS,dT);

    c
    Impl

    c
    Impl

    c=

    c=

    6.1165
    Impl =

    6.1165
    Impl =

    5.6977

    5.7185

    % CompImpl3D.m Compare blsprice and BlsHalton


    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.3
    Smax=100;
    dS=2;
    dT=5/1200;
    [ExpdS1,matval,vetS,vetT]=EuCallImplall(S0,X,r,T,sigma,Smax,dS,dT);
    matval
    ExpdS1
    mesh(vetT,vetS,matval);
    ylabel('Stock price'); xlabel('Time'); title('European Call Option, Implicit
    Method');

    % CompImpl3D.m Compare blsprice and BlsHalton


    S0=50;
    X=50;
    r=0.1;
    T=5/12;
    sigma=0.3
    Smax=100;
    dS=0.5;
    dT=5/1200;
    [ExpdS1,matval,vetS,vetT]=EuCallImplall(S0,X,r,T,sigma,Smax,dS,dT);
    matval
    ExpdS1
    mesh(vetT,vetS,matval);
    ylabel('Stock price'); xlabel('Time'); title('European Call Option,
    Implicit Method');

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