Award Date

5-1-2014

Degree Type

Thesis

Degree Name

Master of Science in Mathematical Science

Department

Mathematical Sciences

First Committee Member

Hongtao Yang

Second Committee Member

Amei Amei

Third Committee Member

Xin Li

Fourth Committee Member

Pushkin Kachroo

Number of Pages

52

Abstract

In this thesis, we have developed two numerical methods for evaluating option prices under the regime switching model of stock price processes: the Finite Difference lattice method and the Monte Carlo lattice method.

The Finite Difference lattice method is based on the explicit finite difference scheme for parabolic problems. The Monte Carlo lattice method is based on the simulation of the Markov chain. The advantage of these methods is their flexibility to compute the option prices for any given stock price at any given time. Numerical examples are presented to examine these methods. It has been shown that the proposed methods provides fast and accurate approximations of option prices. Hence they should be helpful for practitioners working in this field.

Keywords

Finite differences; Monte Carlo method; Options (Finance); Stock options

Disciplines

Corporate Finance | Finance | Finance and Financial Management | Mathematics

Language

English


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