Mathematical analysis and numerical methods for a PDE model of a stock loan pricing problem (Q394918): Difference between revisions

In the present paper, the stock loan pricing problem is addressed in the case when the accumulative dividend yield is returned to the borrower on redemption. The optimal regularity of the solution in anisotropic Sobolev spaces is analyzed, by applying obstacle problem techniques associated to hypoelliptic equations of Kolmogorov type. The authors propose a numerical method to approximate the exact solution; additionally to the discretization method, in order to deal with the nonlinearity associated to the obstacle condition (free boundary problem), the augmented Lagrangian active set method is used. A piecewise quadratic finite element method is considered, so that the joint time and spatial discretization falls in the frame of the Lagrange-Galerkin method.