Meshfree RBF-FD Discretization with Three-Point Stencils for Nonlinear Pricing Options Having Transaction Costs

This paper presents a computational framework for resolving a nonlinear extension of the Black–Scholes partial differential equation that accounts for transaction costs through a volatility function dependent on the Gamma of the option price. A meshfree radial basis function-generated finite difference procedure is developed using a modified multiquadric kernel. Analytical weight formulas for first- and second-order differentiations are discussed on 3-node stencils for both uniform and non-uniform point distributions. The proposed method offers an efficient scheme suitable for accurately pricing European scenarios when nonlinear transaction cost effects.