Finite volume method for the Black-Scholes equation transformed on finite interval
In this paper, we present a fitted FVM for the degenerate at the two ends parabolic equation, derived from the Black-Scholes equation after a transformation to a finite interval. For the case of European options we describe a fully discretization of the vertical method of lines, where the spatial discretization is formulated as a Petrov-Galerkin FEM. We show that the method is O(h) convergent and monotone. Numerical experiments are presented to verify the theoretical results. Experiments on a power-graded mesh demonstrate higher accuracy.
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