Based On The Research Of Bsb Equation Under The Compound Option Pricing Problem

Compound options is options on options, its essence is a series of rights nested. The compound option pricing is a hot issue of today’s financial engineering research, but also the difficult problems. Simple two compound option pricing is to follow the Black-Scholes option pricing theory model, but its assumptions are very strict than the later, and closed-form solutions often contain High-dimensional nested integral that the calculation is quite complicated, all this seriously hinders the innovation of the compound option theory and application. The result shows that the Finite Difference Method has significant advantage on the accuracy, efficiency and stability when applied in option valuation. In addition, the constant volatility assumption in the Black-Scholes option pricing theory model is also not realistic.This paper first introduces the BS option pricing model of the compound option pricing and its application. And extend the assumption that the volatility which is a constant in BS model, then assume that the volatility changes within an interval, that is σmin≤σ≤σmax.It can conclude the BSB model of uncertain volatility option pricing. By theoretical analysis, use the implicit finite difference method, proved BSB model’s advantage to reduce the option price interval in the option pricing compared to BS model.Finally, combined the control equation which the two compound options must meet to, and using the given terminal conditions, initial conditions and the corresponding value instance, it can calculate the numerical solution of the model by the implicit difference method.Through a series of numerical simulation experiments to verify the convergence of the algorithm, making the conclusions in the text is authentic. Data shows that the algorithm can be used for the actual options trading operations, and can be extended to multi-compound option and real option pricing.