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.
|Number of pages||17|
|Journal||Japan Journal of Industrial and Applied Mathematics|
|Publication status||Published - 2013 Feb|
Bibliographical noteFunding Information:
This work was supported by BK21 project of Department of Mathematics in Yonsei University. Beom Jin Kim and H. J. Choe were supported by KRF2011-028951. C.Ahn was supported by R31-20007.
All Science Journal Classification (ASJC) codes
- Applied Mathematics