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 language | English |
|---|---|
| Pages (from-to) | 21-37 |
| Number of pages | 17 |
| Journal | Japan Journal of Industrial and Applied Mathematics |
| Volume | 30 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2013 Feb 1 |
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All Science Journal Classification (ASJC) codes
- Engineering(all)
- Applied Mathematics
Cite this
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Direct computation for American put option and free boundary using finite difference method. / Kim, Beom Jin; Ahn, Cheonghee; Choe, Hi Jun.
In: Japan Journal of Industrial and Applied Mathematics, Vol. 30, No. 1, 01.02.2013, p. 21-37.Research output: Contribution to journal › Article
TY - JOUR
T1 - Direct computation for American put option and free boundary using finite difference method
AU - Kim, Beom Jin
AU - Ahn, Cheonghee
AU - Choe, Hi Jun
PY - 2013/2/1
Y1 - 2013/2/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=84874300771&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84874300771&partnerID=8YFLogxK
U2 - 10.1007/s13160-012-0094-9
DO - 10.1007/s13160-012-0094-9
M3 - Article
VL - 30
SP - 21
EP - 37
JO - Japan Journal of Industrial and Applied Mathematics
JF - Japan Journal of Industrial and Applied Mathematics
SN - 0916-7005
IS - 1
ER -