VIT’s Master of Information Technology and Systems (MITS) is a Post-Graduate course at Australian Qualification Framework (AQF) Level 9. This prestigious Master of IT course offers a substantial opportunity for those who want to succeed in the world of Information Technology. The Master of Information Technology and Systems (MITS) at VIT is designed for people like you who want to enhance their career as an IT professional.
VIT’s Master of Information Technology and Systems (MITS) is a Post-Graduate course at Australian Qualification Framework (AQF) Level 9. This prestigious Master of IT course offers a substantial opportunity for those who want to succeed in the world of Information Technology. The Master of Information Technology and Systems (MITS) at VIT is designed for people like you who want to enhance their career as an IT professional.
VIT’s Master of Information Technology and Systems (MITS) is a Post-Graduate course at Australian Qualification Framework (AQF) Level 9. This prestigious Master of IT course offers a substantial opportunity for those who want to succeed in the world of Information Technology. The Master of Information Technology and Systems (MITS) at VIT is designed for people like you who want to enhance their career as an IT professional.
VIT’s Master of Information Technology and Systems (MITS) is a Post-Graduate course at Australian Qualification Framework (AQF) Level 9. This prestigious Master of IT course offers a substantial opportunity for those who want to succeed in the world of Information Technology. The Master of Information Technology and Systems (MITS) at VIT is designed for people like you who want to enhance their career as an IT professional.
IMPORTANT: A detailed report that contains all relevant parts of the solutions (explanations, graphs, etc.) and includes documented MATLAB scripts (within the document). Most of the marks for programming questions are allocated for explanations of algorithms and discussions of results. If all you hand in is the listing of the “Raw Code” or “Raw Output” by itself, you will get poor marks. All coding should be done in Matlab (nicely commented). The TA will take off marks for poor documentation. Penalty for late submission is 10 marks per day (i.e., you will receive maximum 90 if you submit your assignment on March 19).
Assignment Questions
1. (80 marks) Finite Difference: European Case, constant timesteps
a). Develop Matlab code for pricing European options under a Black Scholes model dSt = rdt + σdZt St using a finite difference method as discussed in class. Use forward/backward/central differ- encing as appropriate to ensure a positive coefficient discretization. The code should be able to use fully implicit, and Crank-Nicolson method. You will have to solve a tridiagonal linear system. DO NOT use the full matrix objects in Matlab. Use the Matlab sparse matrix function spdiags to set up a sparse diagonal matrix of the correct size and use lu Matlab function to solve linear systems. Avoid unnecessary LU factorization computation. b). Solve for a European put option, using the data given in the Table 1 , (with fully implicit, and Crank-Nicolson method ) and compare with the exact solution using blsprice in Matlab. Use constant timestep sizes. c). Show a convergence table, with a series of grids. Show the option value at t = 0, S = 100. Begin with a timestep of ∆τ = T /25, and the grid
σ .4 r .02 Time to expiry (T ) 1.0 years Strike Price $100 Initial asset price S 0 $100
where K is the strike, and we are interested in the solution near S = K.
Note: to carry out a convergence study, you should solve the pricing problem on a sequence of grids. Each grid has twice as many intervals as the previous grid (new nodes inserted halfway between the coarse grid nodes) and the timestep size is halved. Assume that Error = O((∆t)2 , (∆S)2 ) ; ∆S = max(Si+1 − Si ) (1) i
Let h = C1 · ∆S h = C2 · ∆t Suppose we label each computation in the above sequence by a set of h values. Then the solution on each grid (at a given point) has the form V (h) = Vexact + A · h2 V (h/2) = Vexact + A · (h/2)2 V (h/4) = Vexact + A · (h/4)2 (2) where we have assumed that the mesh size and timestep are small enough that the coefficient A in equation (2) is approximately constant. Now, equation (2) implies that V (h) − V (h/2) '4 (3) V (h/2) − V (h/4) Check the theory by examining the rate of convergence of your pricer. Carry out the above tests using fully implicit, and Crank Nicolson method. Show a conver- gence table for each test. d). Show plots of the option value for the range S = [50, 150], for your solution on the finest grid for CN method. Submit your matlab code. 2. (20 marks) Heat Deduction Equation Consider the following PDE from the heat deduction problem ut = uxx , u(t, 0) = 0, u(t, 1) = 0, 2 u(0, x) = −x + x.
2 a). Provide the algorithm (in pseudo-code) for solving the PDE by the Crank-Niclson method. b). Implement the algorithm into Matlab code and plot u(t, x) on the grid of (t = [0, 1] × [0, 1] = x) with M = N = 50 in constant steps. Submit your Matlab Code.
