RADIAL BASIS FUNCTION BASED APPROXIMATION METHODS FOR BASKET OPTION PRICING

Basically two different but mathematically equivalent approaches may be distinguished for options pricing in a pure diffusion- setup: the probabilistic approach and the partial differen- tial equation (PDE) approach. The presence of a jump term in the price process of the asset leads to the partial integro differen- tial equation (PIDEs), which is an extension of the Black-Scholes PDE with an additional integral term. In many cases, however, an explicit closed-form valuation of options in jump diffusions is not possible and one is restricted to numerical procedures. The aim is to show how option prices in the jump-diffusion models, mainly on the Merton and Kou models, can be computed using meshless methods based on radial basis function. We would like to investigate the RBF{PU for numerical solution of partial integro differential equation arising form the multi-asset European vanilla call/put options based on jump-diffusion models.