An adaptive extrapolation discontinuous Galerkin method for the valuation of Asian options

We consider the approximation of the optimal stopping problem associated with ultradiffusion processes in the context of mathematical finance and the valuation of Asian options. In particular, the value function is characterized as the solution of an ultraparabolic variational inequality. Employing the penalty method and a regularization of the state space, we develop higher-order adaptive approximation schemes which utilize the extrapolation discontinuous Galerkin method in temporal space. Numerical examples are provided in order to demonstrate the approach. (C) 2011 Elsevier B.V. All rights reserved.