Multigrid Method for a Two Dimensional Fully Nonlinear Black-Scholes Equation with a Nonlinear Volatility Function

Abstract

This paper deals with the task of pricing European basket options in the presence of transaction costs. We develop a model that incorporates the illiquidity of the market into the classical two-assets Black-Scholes framework. We perform a numerical simulation using finite difference method. We consider a nonlinear multigrid method in order to reduce computational costs. The objective of this paper is to investigate a deterministic extension for the Barles’ and Soner’s model and to demonstrate the effectiveness of multigrid approach to solving a fully nonlinear two dimensional Black-Scholes problem. AMS subject classifications: 65N55, 65N06, 35K55, 65BXX