A numerical study of Asian option with radial basis functions based finite differences method

Abstract

The purpose of this paper is to design and describe the valuation of Asian option by radial basis function approximation. A one state variable partial differential equation which characterizes the price of European type Asian option is discussed. The governing equation is discretized by the θ-method and the option price is approximated by radial basis function based finite difference method. Numerical experiments are performed with European option and Asian option and results are compared with theoretical and numerical results available in the literature. We show numerically that the scheme is second order accurate. Stability of the scheme is also discussed.