Isogeometric Analysis for the Pricing of Financial Derivatives with Nonlinear Models: Convertible Bonds and Options

ArXiv ID: 2412.08987 “View on arXiv”

Authors: Unknown

Abstract

Computational efficiency is essential for enhancing the accuracy and practicality of pricing complex financial derivatives. In this paper, we discuss Isogeometric Analysis (IGA) for valuing financial derivatives, modeled by two nonlinear Black-Scholes PDEs: the Leland model for European call with transaction costs and the AFV model for convertible bonds with default options. We compare the solutions of IGA with finite difference methods (FDM) and finite element methods (FEM). In particular, very accurate solutions can be numerically calculated on far less mesh (knots) than FDM or FEM, by using non-uniform knots and weighted cubic NURBS, which in turn reduces the computational time significantly.

Keywords: Isogeometric Analysis (IGA), Nonlinear Black-Scholes PDEs, Derivative Pricing, Numerical Methods, Computational Efficiency, Derivatives

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 2.5/10
• Quadrant: Lab Rats
• Why: The paper is mathematically dense, focusing on advanced numerical analysis techniques (Isogeometric Analysis, NURBS, nonlinear PDEs) and their rigorous theoretical formulation and comparison, but lacks empirical validation through backtesting or real-world data implementation.

  flowchart TD
    A["Research Goal: Efficient Pricing of Complex Financial Derivatives"] --> B["Methodology: Isogeometric Analysis IGA"]
    B --> C{"Data: Nonlinear Black-Scholes Models"}
    C --> D["Implementation: Weighted Cubic NURBS & Non-Uniform Knots"]
    D --> E["Computation: Solving PDEs for Leland & AFV Models"]
    E --> F["Comparison: IGA vs FDM & FEM"]
    F --> G["Key Findings: High Accuracy on Fewer Meshes & Reduced Computational Time"]