Application of SWR algorithm in option pricing

Abstract:

In this paper, inspired by the idea of solving heat conduction equation by means of Schwarz waveform relaxation algorithm, we analyze the feasibility of applying SWR algorithm in European option pricing. After transforming European call option pricing into a class of initial boundary value problems for heat conduction equation, error functions are obtained with Schwarz iterative method. Then the convergence result of algorithm error and the flow diagrams of algorithm are given. It is showed by a numerical experiment that this algorithm has better estimation effect compared with classical European option pricing formula.