Digital Option Pricing Approach Using A Homotopy Perturbation Method

Amirul Hakam, Islachiyatul Ummah, Frida Akbar Rani, Nur Asiyah, Endah RM Putri

Abstract


An option is a financial contract between buyers and sellers. The Black-Scholes equation is the most popular mathematical equation used to analyze the option pricing. The exact solution of the Black-Scholes equation can be approached by several approximation methods, one of the method is a Homotopy Perturbation Method (HPM). The simplest type of option, digital options were analyzed using the HPM. The digital option pricing approach using the HPM is in a power series form, which in this paper is presented the solution in the fourth power. This solution is compared with the exact solution of the Black-Scholes equation for digital options. The results show that the approach using HPM is very accurate.

Keywords


Digital Option; Black-Scholes Equation; Homotopy Perturbation Method

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References


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DOI: http://dx.doi.org/10.12962/j24775401.v7i2.9776

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International Journal of Computing Science and Applied Mathematics by Pusat Publikasi Ilmiah LPPM, Institut Teknologi Sepuluh Nopember is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at https://iptek.its.ac.id/index.php/ijcsam.