Fitted finite volume method for a generalized Black-Scholes equation transformed on finite interval (Q393762)

The author considers the classical and generalized Black-Scholes equations transforming the infinite (spatial) interval to a \([0,1]\) and writes the boundary-initial problem in variational form. For the continuity and Gårding coercivity he refers to own earlier work. The main body of the paper describes the finite volume method which essentially follows the Scharfetter-Gummel (i.e. L-spline) approach if not counting the boundary elements where no boundary condition can be prescribed due to the degeneracy. Here the author wins an additional degree of freedom by choosing a constant right hand side in the local problems. Next, the equations are fully discretized using the \(\theta\)- (or weighted difference) method. It is proved that the system matrix is an \(M\)-matrix for sufficiently small time step (independently of \(\theta\)). The numerical experiments (using Crank-Nicolson) mostly show first-order convergence. The question of small damped oscillations in the case of a discontinuous initial function is also discussed.