Research article Special Issues

On some dynamic inequalities of Hilbert's-type on time scales

  • † These two authors contributed equally to this work and are co-first authors.
  • In this article, we will prove some new conformable fractional Hilbert-type dynamic inequalities on time scales. These inequalities generalize some known dynamic inequalities on time scales, unify and extend some continuous inequalities and their corresponding discrete analogues. Our results will be proved by using some algebraic inequalities, conformable fractional Hölder inequalities, and conformable fractional Jensen's inequalities on time scales.

    Citation: Ahmed A. El-Deeb, Dumitru Baleanu, Nehad Ali Shah, Ahmed Abdeldaim. On some dynamic inequalities of Hilbert's-type on time scales[J]. AIMS Mathematics, 2023, 8(2): 3378-3402. doi: 10.3934/math.2023174

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  • In this article, we will prove some new conformable fractional Hilbert-type dynamic inequalities on time scales. These inequalities generalize some known dynamic inequalities on time scales, unify and extend some continuous inequalities and their corresponding discrete analogues. Our results will be proved by using some algebraic inequalities, conformable fractional Hölder inequalities, and conformable fractional Jensen's inequalities on time scales.



    The well-known Black-Scholes (B-S) equation [1] for multi-asset option pricing is the following d-dimensional partial differential equation (PDE):

    v(S,t)t+12di,j=1σiσjρijSiSj2v(S,t)SiSj+rdi=1Siv(S,t)Sirv(S,t)=0, (1.1)

    for (S,t)(0,)d×[0,T) with the final condition v(S,T)=vT(S), where v(S,t) is the value of the option in the multi-asset S=(S1,S2,,Sd) at time t. T is the maturity time, σi is the volatility of underlying asset Si, ρij is the correlation between i-th and j-th assets, and r is the risk-free interest rate.

    However most of the financial derivatives specially linear ones have analytical solutions, but they are not often easy to implement. Therefore the numerical methods would be suitable to find numerical approximations of them. Various numerical methods have been considered for one and multi-dimensional Black-Scholes equations. For instance, mesh free methods [9], high-order option pricing schemes [10,14], alternating direction implicit schemes [2,7] and etc. Furthermore, not only the numerical methods are so common to implement for the financial derivatives, but also they have been implemented for other variety problems and equations frequently [3,11,12,15].

    One of the most common and simple numerical methods to implement for solving PDEs is FDMs. The main problem of FDMs for pricing multi-asset options with non-linear payoffs is significant numerical errors around their boundary points and also the strike price K. Several studies have been done to achieve an accurate numerical solution of multi-asset options. Jeong et al. [8] proposed a useful remedy to reduce numerical error around Smax by using the standard Monte Carlo simulation at this boundary point. Here we improved their methodology by using the antithetic variate method in Monte Carlo simulation [4], and furthermore a space transformation [13,16] that causes more nodal points around the strike price to get more robust solution.

    Two-dimensional B-S equation with two assets x=S1 and y=S2 is the following PDE:

    uτ=12σ2xx22ux2+12σ2yy22uy2+σxσyρ2uxy+rxux+ryuyru, (2.1)

    for (x,y,τ)Ω×[0,T) with the initial condition u(x,y,0)=u0(x,y) which is the Eq (1.1) with d=2 and a variable changing τ=Tt in the truncated domain Ω=(0,xmax)×(0,ymax). Suppose LBS is the operator of the right hand side of Eq (2.1). Now we discretize the time interval with a uniform time step Δτ=T/Nτ and the following grid stretching transformation that makes non-uniform space discretization of the interval [xmin,xmax] with more nodal points around K:

    x=K(1+sinh(c2w+c1(1w))15),  for  w[0,1], (2.2)

    where c1=arcsinh(15(xminK)/K) and c2=arcsinh(15(xmaxK)/K). Therefore x(w)[xmin,xmax] for any w[0,1]. The grid stretching transformation by locating more nodal points around the strike price K, leads to reduce the numerical errors around K for the options with non-smooth payoffs which can be applied to even higher order finite difference methods in both single and multi-asset Black-Scholes equations. At first for the x-direction, we discretize the interval [0,1] uniformly to Nx sub-intervals, then we use the transformation (2.2) in [0,xmax] and define hxi=xi+1xi for i=0,,Nx1. we discretize the interval [0,ymax] to Ny sub-intervals similarly. Let for i=0,,Nx, j=0,,Ny and n=0,,Nτ define uniju(xi,yj,τn) and use the operator splitting method for solving Eq (2.1) with the following two discrete fractional time step equations:

    un+12ijunijΔτ=LxBS(αun+12ij+βunij), (2.3)
    un+1ijun+12ijΔτ=LyBS(αun+1ij+βun+12ij), (2.4)

    where α0, β0 and α+β=1. We can choose different sets of values of α and β to achieve us implicit or explicit schemes in both (2.3) and (2.4). These schemes have first-order accuracy in general [5]. Here we take the implicit scheme by choosing α=1 and β=0 for both Eqs (2.3) and (2.4) which leads to a consistent and stable scheme and thereby the scheme is convergent with the first order of accuracy in time. Furthermore, with the operators (LxBSu)n+12ij and (LyBSu)n+1ij as follows, we obtain the second order of accuracy in space as the central finite difference approximations have been used for the space derivatives.

    (LxBSu)n+12ij=(σxxi)22Dxxun+12ij+σxσyρxiyj2Dxyunij+rxiDxun+12ijr2un+12ij, (2.5)
    (LyBSu)n+1ij=(σyyj)22Dyyun+1ij+σxσyρxiyj2Dxyun+12ij+ryjDyun+1ijr2un+1ij, (2.6)

    where the derivatives approximations are defined as

    Dxxuij2hxi1(hxi1+hxi)ui1,j2hxi1hxiuij+2hxi(hxi1+hxi)ui+1,j, (2.7)
    Dxyuijui+1,j+1ui1,j+1ui+1,j1+ui1,j1hxihyj+hxi1hyj+hxihyj1+hxi1hyj1, (2.8)
    Dxuijhxihxi1(hxi1+hxi)ui1,j+hxihxi1hxi1hxiuij+hxi1hxi(hxi1+hxi)ui+1,j. (2.9)

    By substituting above derivatives in Eq (2.3), the following equations will be achieved:

    αiun+12i1,j=βiun+12i,j+γiun+12i+1,j=fij,   i=1,,Nx, (2.10)

    where αi, βi and γi are the lower, main and upper diagonal of the tridiagonal matrix of the above system of equations respectively and fij is the constant vector of the system which are defined as:

    αi=(σxxi)2hxi1(hxi1+hxi)+rxihxihxi1(hxi1+hxi), (2.11)
    βi=1Δτ+(σxxi)2hxi1hxirxi(hxihxi1)hxi1hxi+r2, (2.12)
    γi=(σxxi)2hxi(hxi1+hxi)rxihxi1hxi(hxi1+hxi), (2.13)
    fnij=12σxσyρxiyjDxyunij1Δτunij, (2.14)

    for fixed j and the linear boundary condition at the boundaries. For instance u0j=2u1ju2j, for j=1,,Ny and similarly for uNx,j, ui0 and ui,Ny or at the end point of the domain, we apply the Monte Carlo simulation with the antithetic variate method (AMC) or the standard Monte Carlo simulation (MC). The solution of the above system of equations will be the vector u121:Nx,j. Similarly by substituting the derivatives approximations with respect to y in (2.4), we have another system of equations to solve for finding the value of the two-asset option.

    Note that with the AMC and the MC simulations we obtain the option value VAMC and VMC respectively at time t=0 and (x,y)=(xmax,ymax) as follow:

    VAMC=erTMMm=1[12(Λ(Smax)+Λ(˜Smax))], (2.15)
    VMC=erTMMm=1(Λ(Smax)), (2.16)

    where

    Smax=[xmax×e((rΦ22)T+Σ(1,:).z.T),ymax×e((rΦ22)T+Σ(2,:).z.T)], (2.17)
    ˜Smax=[xmax×e((rΦ22)TΣ(1,:).z.T),ymax×e((rΦ22)TΣ(2,:).z.T)], (2.18)

    and M is the number of replications in the antithetic and the standard Monte Carlo simulation which in this work we choose M=106, Λ is a payoff function, z, Σ and Φ are the random vector from a standard normal distribution, the volatility matrix and a vector with the size of multi-asset respectively. For instance, for the case of two-asset Σ and Φ are as follows:

    Σ=[σ11σ12σ21σ22], (2.19)
    Φ=diag(Σ×Σ)=[σ11×σ12σ21×σ22], (2.20)

    where the elements of the volatility matrix will be obtained by solving the following system of equations:

    σx=σ211+σ212, (2.21)
    σy=σ221+σ222, (2.22)
    ρ=σ11σ21+σ12σ22(σ211+σ212)(σ221+σ222). (2.23)

    Then with the exponential interpolation between V (which is VAMC or VMC) and the payoff value u0Nx,Ny, we obtain the option price at the end point of the domain for every time step:

    unNx,Ny=u0Nx,Ny(Vu0Nx,Ny)nΔτT,  n=0,,Nτ. (2.24)

    Here we solve numerically the B-S equation in one and two-dimensional space for different options with these parameters: T=1, K1=K2=100, r=0.03, σx=σy=0.3, ρ=0.5.

    A power call option has a payoff max(xpK,0) where pR+ is a power. The closed-form solution of the power option is given by [18]:

    u(x,τ)=xpe(p1)(r+pσ2/2)τN(d1)KerτN(d2) (3.1)

    where

    d1=ln(xpK)+(r+(p0.5)σ2)τστ,d2=d1pστ. (3.2)

    Note that the power option with p=1 is the call option. Figure 1 shows the comparison of the numerical errors of one-asset power call option with different schemes: The equidistance discretization in space with the linear boundary condition (Equi&L), the grid stretching discretization around the strike price with linear boundary condition (GS&L), the equidistance discretization in space with Monte Carlo simulation at Smax (Equi&MC) and the grid stretching discretization with the antithetic Monte Carlo simulation at Smax (GS&AMC).

    Figure 1.  One-asset power call option with p=2, Smax=250, Nx=250 and Δτ=1720, exact option price (top-left), payoff (top-right), Equi&L error (middle-left), GS&L error (middle-right), Equi&MC error (bottom-left) and GS&AMC error (bottom-right).

    Table 1 shows the RMSE of the power option with Nx=250 and Δτ=1720 for p=1, p=2 and p=3 in the whole domain Ω=(0,Smax) and the interesting domain around the strike price Ωe=[0.7pK,1.3pK] for the different schemes and different Smax. Keep in mind that in the grid stretching transformation (2.2) we must substitute pK instead of K. We can see the MC and AMC simulation at the end point of the domain reduce RMSE significantly for bigger p and none of the GS, MC and AMC improve the accuracy of the numerical approximation for the call option (p=1).

    Table 1.  RMSE for the power call option.
    Smax 150 200 250 300 350 400 450
    Equi&L 0.3452 0.0271 0.0024 0.0009 0.0008 0.0008 0.0008
    p=1 GS&L 0.2737 0.0165 0.0022 0.0017 0.0016 0.0016 0.0015
    Ω Equi&MC 0.0457 0.0172 0.0072 0.0511 0.0148 0.0038 0.0419
    GS&AMC 0.0457 0.0033 0.0032 0.0023 0.0023 0.0017 0.0024
    Equi&L 0.1505 0.0015 0.0015 0.0016 0.0017 0.0018 0.0019
    p=1 GS&L 0.1122 0.0027 0.0024 0.0022 0.0021 0.0021 0.0020
    ΩK Equi&MC 0.0563 0.0016 0.0015 0.0016 0.0017 0.0018 0.0019
    GS&AMC 0.0472 0.0023 0.0024 0.0022 0.0021 0.0021 0.0020
    Smax 150 200 250 300 350 400 450
    Equi&L 6.8424 6.8064 7.7089 8.9340 10.2820 11.6811 13.1029
    p=2 GS&L 8.4653 6.1009 5.8106 6.0578 6.4852 6.9842 7.5149
    Ω Equi&MC 0.2272 0.0685 0.0319 0.0205 0.0457 0.0926 0.0863
    GS&AMC 0.3311 0.0253 0.0244 0.0345 0.0266 0.0364 0.0348
    Equi&L 10.4749 5.5909 2.9152 1.7040 1.0414 0.6631 0.4350
    p=2 GS&L 9.6261 4.6061 2.3610 1.3371 0.8022 0.5133 0.3308
    ΩK Equi&MC 0.3478 0.0661 0.0193 0.0170 0.0115 0.0161 0.0106
    GS&AMC 0.3765 0.0245 0.0165 0.0203 0.0146 0.0117 0.0081
    Smax 3150 3200 3250 3300 3350 3400 3450
    Equi&L 19.3431 22.0844 25.8076 29.9848 34.3954 38.9355 43.5521
    p=3 GS&L 28.5178 25.4178 25.0462 25.8940 27.3175 29.0375 30.9201
    Ω Equi&MC 1.2650 0.6127 0.4785 0.3064 0.3175 0.2029 0.1936
    GS&AMC 1.9696 0.9038 0.5715 0.3920 0.3462 0.2689 0.2511
    Equi&L 31.1024 33.1054 28.4051 21.9288 17.3308 14.1742 11.8378
    p=3 GS&L 32.8550 28.7798 23.0077 17.4396 13.9633 11.2298 9.3862
    ΩK Equi&MC 2.0303 0.9183 0.6883 0.4127 0.3427 0.2148 0.1607
    GS&AMC 2.2680 1.0233 0.6413 0.4100 0.3167 0.2264 0.1849

     | Show Table
    DownLoad: CSV

    Now we consider a European call option on the maximum of two assets with the payoff u(x,y,0)=max{max{x,y}K,0}. Then the following exact analytical solutions of the option [17] will be compared to the numerical solutions.

    u(x,y,τ)=xM(d1,d;ρ1)+yM(d2,d+στ;ρ2)Kerτ[1M(d1+σ1τ,d2+σ2τ;ρ)], (3.3)

    where M is the cumulative bivariate normal distribution function and defined as

    M(a,b;ρ)=12π1ρ2baexp(x22ρxy+y22(1ρ2))dxdy, (3.4)

    and other parameters are as follows:

    d1=ln(xK)+(r+σ2x2)TσxT,d2=ln(yK)+(r+σ2y2)TσyT,d=ln(xy)+σ22TσT, (3.5)
    σ=σ2x+σ2y2ρσxσy,    ρ1=(σxρσy)/σ,    ρ2=(σyρσx)/σ. (3.6)

    Figure 2 shows the comparison of the numerical solutions of the call option on the maximum of two assets with the different schemes and (xmax,ymax)=(250,250).

    Figure 2.  Call option on the maximum of two assets with Nx=Ny=250 and Δτ=1720 exact option price (top-left), payoff (top-right), Equi&L error (middle-left), GS&L error (middle-right), Equi&MC error (bottom-left) and GS&AMC error (bottom-right).

    Now in Table 2 we compare the RMSE of these four schemes in the whole region Ω=(0,xmax)×(0,ymax) and in the most interesting region ΩK=(0.7K,1.3K)×(0.7K,1.3K) with different domain sizes (xmax,ymax)=(L,L) and Nx=Ny=L at t=0.

    Table 2.  RMSE of call on the maximum of two assets.
    L 150 200 250 300
    Equi&L 12.1428 16.9562 22.3907 28.4710
    GS&L 9.1971 5.7377 5.4052 5.5654
    Ω Equi&MC 2.6188 3.0868 3.8931 4.6910
    GS&AMC 2.2287 1.5009 1.7865 2.0569
    Equi&L 8.5065 0.7793 0.0690 0.0084
    GS&L 6.1609 0.4476 0.0354 0.0051
    ΩK Equi&MC 2.1547 0.2287 0.0225 0.0048
    GS&AMC 1.9339 0.1858 0.0178 0.0040

     | Show Table
    DownLoad: CSV

    A European call on the minimum of two assets has the payoff u(x,y,0)=max{min{x,y}K,0} and the closed form solution as follows [17]

    u(x,y,τ)=xM(d1,d;ρ1)+yM(d2,dστ;ρ2)KerτM(d1σ1τ,d2σ2τ;ρ). (3.7)

    where its parameters are the same as the European call option on the maximum of two assets. In Figure 3 and Table 3 we compare the four above mentioned schemes for this two-asset option.

    Figure 3.  Call option on the minimum of two assets with (xmax,ymax)=(250,250), Nx=Ny=250 and Δτ=1720 exact option price (top-left), payoff (top-right), Equi&L error (middle-left), GS&L error (middle-right), Equi&MC error (bottom-left) and GS&AMC error (bottom-right).
    Table 3.  RMSE of call on the minimum of two assets.
    L 150 200 250 300
    Equi&L 11.4121 16.5529 21.9750 28.0137
    GS&L 8.7458 5.6337 5.1434 5.1969
    Ω Equi&MC 0.9972 1.4289 1.8595 3.7692
    GS&AMC 0.8470 0.7205 0.6078 0.5893
    Equi&L 8.2864 0.7763 0.0666 0.0062
    GS&L 5.9848 0.4443 0.0330 0.0030
    ΩK Equi&MC 1.0381 0.1382 0.0128 0.0029
    GS&AMC 0.6490 0.0951 0.0087 0.0016

     | Show Table
    DownLoad: CSV

    Here we consider a two-asset correlation call option wich pays off:

    u(x,y,0)={yK2  ,if  x>K10  ,otherwise (3.8)

    This option has been priced by [18]:

    u(x,y,τ)=yM(dy+σyτ,dx+ρσyτ;ρ)KerτM(dy,dx;ρ), (3.9)

    where ρ is the correlation coefficient between the returns on the two assets and

    dx=ln(xK)+(rσ2x2)TσxT,     dy=ln(yK)+(rσ2y2)TσyT. (3.10)

    Now we solve numerically this option. Figure 4 shows the comparison of the numerical solutions of two-asset correlation call option with the different schemes.

    Figure 4.  Two-asset correlation call option with (xmax,ymax)=(250,250), Nx=Ny=250 and Δτ=1720, exact option price (top-left), payoff (top-right), Equi&L error (middle-left), GS&L error (middle-right), Equi&MC error (bottom-left) and GS&AMC error (bottom-right).

    Table 4 shows the RMSE of the equidistance discretization (Equi) and the grid stretching discretization around the strike price with Monte Carlo simulation at the last point of the boundary (xmax,ymax)=(L,L) (GS&MC)with different L in the whole region Ω=[0,L]×[0,L] and the most interesting region ΩK=[0.7K,1.3K]×[0.7K,1.3K] respectively.

    Table 4.  RMSE for the correlation call option.
    L 150 200 250 300
    Equi&L 0.8040 0.5688 0.6639 0.7581
    GS&L 0.7340 0.6739 0.9008 0.9729
    Ω Equi&MC 0.2578 0.3740 0.5793 0.8419
    GS&AMC 0.1999 0.5024 0.8245 0.8788
    Equi&L 0.2386 0.1022 0.1023 0.1023
    GS&L 0.1803 0.0213 0.0181 0.0108
    ΩK Equi&MC 0.2582 0.1255 0.1047 0.1026
    GS&AMC 0.2355 0.0474 0.0171 0.0110

     | Show Table
    DownLoad: CSV

    A butterfly option can be regarded as a combination of two long calls with strikes K1 and K2 and two short calls both with strike K=(K1+K2)/2. Thus, for given values K1,K2>0 with K1<K2, the payoff of a two-asset European butterfly option is:

    u(x,y,0)=max{max{x,y}K1,0}+max{max{x,y}K2,0}2max{max{x,y}K,0}, (3.11)

    and has the following analytical solution:

    u(x,y,τ)=x[M(d(1)1,d;ρ1)2M(d1,d;ρ1)+M(d(2)1,d;ρ1)]+y[M(d(1)2,d+στ;ρ2)2M(d2,d+στ;ρ2)+M(d(2)2,d+στ;ρ2)]K1erτ[1M(d(1)1+σxτ,d(1)2+σyτ;ρ)]+2Kerτ[1M(d1+σxτ,d2+σyτ;ρ)]K2erτ[1M(d(2)1+σxτ,d(2)2+σyτ;ρ)],

    where the M(a,b;ρ) is the cumulative bivariate normal distribution function (3.4) and other parameters are defined in (3.5) and (3.6). where d(i)1 and d(i)2 will be obtained by substituting Ki in 3.5 for i=1,2.

    Here we consider a two-asset butterfly option with K1=50, K2=150. Figure 5 shows the comparison of the numerical solutions of the two-asset butterfly option with the equidistance and the grid stretching discretization schemes. Since u0Nx,Ny=0 we can not use the Monte Carlo simulation at the end point of the domain in (2.24).

    Figure 5.  Two-asset butterfly option with K1=50,K2=150, (xmax,ymax)=(250,250), Nx=Ny=250 and Δτ=1720, exact option price (top-left), payoff (top-right), Equi error (bottom-left), GS error (bottom-right).

    Now in Table 5 we compare the RMSE of the equidistance discretization (Equi) and the grid stretching discretization (GS) for the space in the whole region Ω=(xmax,ymax) and the most interesting region ΩK=[0.7K1,1.3K2]×[0.7K1,1.3K2] with different domain sizes (xmax,ymax)=(L,L) and Nx=Ny=L at t=0. We can see in this option the GS scheme does not have any superiority over Equi for the bigger domain.

    Table 5.  RMSE for the two-asset butterfly option.
    L 200 250 300 350
    Equi 1.0136 0.2986 0.2065 0.1753
    Ω GS 0.5842 0.2733 0.2258 0.1946
    Equi 0.8978 0.0174 0.0043 0.0042
    ΩK GS 0.5099 0.0098 0.0052 0.0049

     | Show Table
    DownLoad: CSV

    The payoff function of a two-asset cash-or-nothing option is given by

    u(x,y,0)={c,if  xK1,yK20,otherwise, (3.12)

    which c is a constant. The closed form solution for the two-asset cash-or-nothing option is as follows

    u(x,y,τ)=cerτM(dx,dy;ρ), (3.13)

    where M(a,b;ρ) is the cumulative bivariate normal distribution function (3.4) and dx and dy are the same as (3.10). Now we consider a two-asset cash-or-nothing call option with c=100, then the exact analytical solutions of the option [6] will be compared to the numerical solutions. Figure 6 shows the comparison of the numerical solutions of the option with the different four schemes and also Table 6 demonstrates the RMSE of the four schemes with different domain sizes (xmax,ymax)=(L,L), Nx=Ny=L and Δτ=1720 in the whole region Ω and the in interesting region ΩK. Since the payoff of this option is constant at the end point of the domain, we can see that the MC and AMC simulations do not have any superiority for the bigger domain.

    Figure 6.  Two-asset cash-or-nothing call option with (xmax,ymax)=(250,250), Nx=Ny=250 and Δτ=1720, exact option price (top-left), payoff (top-right), Equi&L error (middle-left), GS&L error (middle-right), Equi&MC error (bottom-left) and GS&AMC error (bottom-right).
    Table 6.  RMSE for the cash-or-nothing call option.
    L 150 200 250 300
    Equi&L 3.6561 1.1174 0.9870 0.9458
    GS&L 3.0292 0.6828 0.5302 0.3400
    Ω Equi&MC 1.3850 1.0302 0.9847 0.9462
    GS&AMC 1.1707 0.6454 0.5294 0.3400
    Equi&L 0.0429 0.0218 0.0217 0.0217
    GS&L 0.0237 0.0051 0.0042 0.0024
    ΩK Equi&MC 0.0250 0.0217 0.0217 0.0217
    GS&AMC 0.0047 0.0050 0.0042 0.0024

     | Show Table
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    We applied the FDM for solving numerically one and two-dimensional B-S equations with different space discretization and boundary conditions. Also, RMSE has been applied for estimating error of the method as it is common to use and consider the numerical errors for all nodal points of the region. Numerical experiments illustrated that by applying the antithetic Monte Carlo simulation for the end point of the space domain and discretization with grid stretching to put more nodal points around the non-smooth point of the payoff function, we obtained more accurate numerical solutions in the considered exotic options with non-constant payoff at the end point of the space domain. These remedies can be considered and implemented for other options, higher dimensional models, nonlinear B-S equations and also other financial derivatives.

    The authors would like to thank the reviewers for their helpful suggestions and comments, which improved the quality of this article.

    The authors declare that they have no conflicts of interest.



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