Direct computation for American put option and free boundary using finite difference method

Beom Jin Kim, Cheonghee Ahn, Hi Jun Choe

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

We present a direct computation scheme for pricing American put option using finite difference method (FDM) characterized by the node moving and the fixed node scale in continuation region. The work is motivated by the necessity for better understanding of the solution surface near free boundary (early exercise boundary). We exploit an intermediate function which has Lipschitz character near free boundary. The intermediate function produces a linearly converging algorithm to locate the free boundary which appears as the real root of a cubic polynomial. In conclusion, our method shows good performance in accuracy and convergence speed.

Original languageEnglish
Pages (from-to)21-37
Number of pages17
JournalJapan Journal of Industrial and Applied Mathematics
Volume30
Issue number1
DOIs
Publication statusPublished - 2013 Feb 1

All Science Journal Classification (ASJC) codes

  • Engineering(all)
  • Applied Mathematics

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