A Review of the Recent Advances Made in the Black-Scholes Models and Respective Solutions Methods
Yasir Hamad Al Saedi and Gurudeo Anand Tularam
DOI : 10.3844/jmssp.2018.29.39
Journal of Mathematics and Statistics
Volume 14, Issue 1
The Black-Scholes model has been a major advance in finance over a period of time; this paper examines this model in some detail, in terms of the latest developments in both analytical and numerical solutions. The paper initially briefly examines historical aspects but quickly moves to a critical analysis of the works in the applications, solutions and implications for the efficiency and use of these. More specifically, this paper critically reviews the existing literature on the proposed exact as well as the numerical solutions to the Black-Scholes model. For this purpose, the exact solution literature on the Black-Scholes model includes speed based solutions and techniques based on valuation issues, time varying instruments and stochastic volatility. Similarly, the key numerical solutions include finite difference methods, the semi-discretization technique, Crank-Nicolson and the R3C scheme, the cubic spline wavelets and multi-wavelet bases method, the two-step backward differentiation formula in the temporal discretization and a High-Order Difference approximation with Identity Expansion (HODIE) scheme and fractional Black-Scholes model (TFBSM) along with Fourier analysis. This analysis reveals that transaction costs, high volatility, illiquid markets and large investor preferences are the key issues of today’s financial derivatives markets, especially after the Global Financial Crisis (GFC). These issues require non-linear solutions to the Black-Scholes models; therefore, Crank-Nicolson and the R3C scheme should be focused upon more by incorporating more and more real-life assumptions of current day trading.
© 2018 Yasir Hamad Al Saedi and Gurudeo Anand Tularam. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.