Wednesday, 16:15 - 16:40 h, Room: MA 313


Wen Chen
A power penalty method for fractional Black-Scholes equations governing American option pricing

Coauthor: Song Wang


In this talk, we present a power penalty approach to the linear fractional differential complementarity problem arising from pricing American options under a geometric Levy process. The problem is first reformulated as a variational inequality, and the variational inequality is then approximated by a nonlinear fractional partial differential equation (fPDE) containing a power penalty term. We will show that the solution to the penalty fPDE converges to that of the variational inequality problem with an exponential order. A finite difference method is proposed for solving the penalty nonlinear fPDE. Numerical results will be presented to illustrate the theoretical findings and to show the effectiveness and usefulness of the methods.


Talk 3 of the contributed session Wed.3.MA 313
"Applications of complementarity" [...]
Cluster 3
"Complementarity & variational inequalities" [...]


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