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February  2020, 19(2): 699-714. doi: 10.3934/cpaa.2020032

(1+2)-dimensional Black-Scholes equations with mixed boundary conditions

Junkee Jeon 1, and  Jehan Oh 2,,

1. 

Department of Applied Mathematics & Institute of Natural Science, Kyung Hee University, Yongin, 17104, Republic of Korea
2. 

Department of Mathematics, Kyungpook National University, Daegu, 41566, Republic of Korea

* Corresponding author

Received  September 2018 Revised  April 2019 Published  October 2019

In this paper, we investigate (1+2)-dimensional Black-Scholes partial differential equations(PDE) with mixed boundary conditions. The main idea of our method is to transform the given PDE into the relatively simple ordinary differential equations(ODE) using double Mellin transforms. By using inverse double Mellin transforms, we derive the analytic representation of the solutions for the (1+2)-dimensional Black-Scholes equation with a mixed boundary condition. Moreover, we apply our method to European maximum-quanto lookback options and derive the pricing formula of this options.

Keywords: (1+2)-dimensional Black-Scholes equations, parabolic partial differential equations, double-Mellin transform, mixed boundary condition, option pricing.
Mathematics Subject Classification: 35K20.
Citation: Junkee Jeon, Jehan Oh. (1+2)-dimensional Black-Scholes equations with mixed boundary conditions. Communications on Pure & Applied Analysis, 2020, 19 (2) : 699-714. doi: 10.3934/cpaa.2020032
References:
[1]

J. Bertrand, P. Bertrand and J. P. Ovarlez, The Mellin transform, in The Transforms and Applications Handbook (ed. A.D. Poularikas), IEEE Press, New York, (1996), 829–885.  Google Scholar

[2]

M. Dai, H. Y. Wong and Y. K. Kwok, Quanto lookback options, Math. Finance, 14 (2004), 445-467.  doi: 10.1111/j.0960-1627.2004.00199.x.  Google Scholar

[3]

A. Dravid, M. Richardson and T. S Sun, Pricing foreign index contingent claims: An application to Nikkei index warrants, Journal of Derivatives, 1 (1993), 33-51.   Google Scholar

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H. Eltayeb and A. Kılıçman, A note on Mellin transform and partial differential equations, Int. J. Pure Appl. Math., 34 (2007), 457-467.   Google Scholar

[5]

J. Jeon, H. Han, H. Kim and M. Kang, An integral equation representation approach for valuing Russian options with a finite time horizon, Commun. Nonlinear Sci. Numer. Simul., 36 (2016), 496-516.  doi: 10.1016/j.cnsns.2015.12.019.  Google Scholar

[6]

I. N. Sneddon, The Use of Integral Transforms, McGraw-Hill, New York., 1972. Google Scholar

[7]

J. H. Yoon and J. H. Kim, The pricing of vulnerable options with double Mellin transforms, J. Math. Anal. Appl., 422 (2015), 838-857.  doi: 10.1016/j.jmaa.2014.09.015.  Google Scholar

show all references

References:
[1]

J. Bertrand, P. Bertrand and J. P. Ovarlez, The Mellin transform, in The Transforms and Applications Handbook (ed. A.D. Poularikas), IEEE Press, New York, (1996), 829–885.  Google Scholar

[2]

M. Dai, H. Y. Wong and Y. K. Kwok, Quanto lookback options, Math. Finance, 14 (2004), 445-467.  doi: 10.1111/j.0960-1627.2004.00199.x.  Google Scholar

[3]

A. Dravid, M. Richardson and T. S Sun, Pricing foreign index contingent claims: An application to Nikkei index warrants, Journal of Derivatives, 1 (1993), 33-51.   Google Scholar

[4]

H. Eltayeb and A. Kılıçman, A note on Mellin transform and partial differential equations, Int. J. Pure Appl. Math., 34 (2007), 457-467.   Google Scholar

[5]

J. Jeon, H. Han, H. Kim and M. Kang, An integral equation representation approach for valuing Russian options with a finite time horizon, Commun. Nonlinear Sci. Numer. Simul., 36 (2016), 496-516.  doi: 10.1016/j.cnsns.2015.12.019.  Google Scholar

[6]

I. N. Sneddon, The Use of Integral Transforms, McGraw-Hill, New York., 1972. Google Scholar

[7]

J. H. Yoon and J. H. Kim, The pricing of vulnerable options with double Mellin transforms, J. Math. Anal. Appl., 422 (2015), 838-857.  doi: 10.1016/j.jmaa.2014.09.015.  Google Scholar

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