Far field boundary conditions for Black-Scholes equations (Q2706366)

The partial differential equations approach for valuing European-style options is considered. In order to solve the equations numerically by finite difference or finite element methods it is necessary to introduce an artificial boundary in order to make the computational domain bounded. Pointwise bounds for the error cause by various boundary conditions imposed on the artificial boundary are derived. The error estimates can be used to determine a priori a suitable location for the artificial boundary in terms of a given error tolerance.