Hermite Finite Difference Through Kernel Approximations to Efficiently Solve Nonlinear Black-Scholes Model

Abstract

We develop a high-order compact numerical scheme for solving a nonlinear Black–Scholes equation arising in option pricing under transaction costs. By leveraging a Hermite-enhanced Radial Basis Function-Finite Difference (RBF-HFD) method with three-point stencils, we achieve fourth-order spatial accuracy. The fully nonlinear PDE, driven by Gamma-dependent volatility models, is discretized via RBF-HFD in space and integrated using an explicit sixth-order Runge–Kutta scheme. Numerical results confirm the proposed method’s accuracy, stability, and its capability to capture sharp gradient behavior near strike prices.