A More Accurate Finite Difference Approximation for the Valuation of Options

Abstract

Schwartz [3] proposed a model to solve for the value of a warrant or an option when a closed-form solution of the valuation equation cannot be obtained. This model is based on a difference approximation of the valuation equation and uses standard numerical methods. We intend to show here that the same methods can be used to derive a difference approximation of the solution of the valuation equation which has a greater level of accuracy than Schwartz's approximation.