Finite Element Algorithms for Pricing 2-D Basket Options

In this paper, finite element method (FEM) was applied to price continuous Asian options. Asian option function with two space variables and time variable was approximated in space discretization by using FEM interpolation and time derivative was approximated by using difference schemes. As a result, FEM algebraic equations were built based on Galerkin FEM and implicit or Crank-Nicosol time integration schemes. The algebraic equation was solved by SOR, and the values of Asian option were obtained. In numerical testing, the fixed and floating strike price European-Asian option equations were solved, and satisfactory pricing results were obtained. The computational results demonstrate that, FEM´s local refinement mesh model is a effective approach for solving option equations.