A robust and accurate finite difference method for a generalized Black–Scholes equation

In this paper we present a numerical method for a generalized Black–Scholes equation, which is used for option pricing. The method is based on a central difference spatial discretization on a piecewise uniform mesh and an implicit time stepping technique. Our scheme is stable for arbitrary volatility and arbitrary interest rate, and is second-order convergent with respect to the spatial variable. Furthermore, the present paper efficiently treats the singularities of the non-smooth payoff function. Numerical results support the theoretical results.