Computational algorithm for financial mathematical model based on European option (Q6066837)

In this article, a computational approach based on the combination of finite difference with the operational matrix approach is constructed for the time-fractional Black-Scholes model (TFBSM) arising in the financial market. More precisely, the authors applied the L1-2 approximation for discretizing the time-fractional derivative and meshfree operational matrix approach based on Legendre polynomials (SLP) and shifted Chebyshev polynomials (SCP) basis function in the spatial direction. The proposed algorithm easily transforms the TFBSM into a system of algebraic equations, which can be solved easily to get the numerical solution. Stability of the numerical scheme is also verified numerically, by adding some noise in the initial data. The proposed numerical scheme has been tested on five test models and it is observed that with this computational approach, the accuracy is almost the same with respect to both the basis functions but the CPU time taken by scheme with SLP basis is less than the SCP basis function. A study on the effects of different parameters such as fractional order, volatility, interest rate, and strike price on the European call and put option pricing have been analyzed.