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MS 1 MINISYMPOSIUM: ADVANCED IMAGING FOR INDUSTRIAL APPLICATION Read chapter Read first chapter

2016 | Supplement | Chapter

A Positive, Stable and Consistent Front-Fixing Numerical Scheme for American Options

Authors : R. Company, V. N. Egorova, L. Jódar

Published in: Progress in Industrial Mathematics at ECMI 2014

Publisher: Springer International Publishing

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Abstract

In this paper we propose an explicit finite-difference scheme to solve the American option pricing problem. It is based on front-fixing transformation that involves unknown free boundary to the equation. The proposed stable and consistent numerical scheme preserves positivity and monotonicity of the solution in accordance with the behavior of the exact solution. Numerical examples and comparison with other methods are included. This technique can be applied to some types of two-asset options after reducing the dimension. In the paper the front-fixing method is applied to exchange option pricing.

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previous chapter An Efficient Monte Carlo Algorithm for Pricing Arithmetic Asian Options Under a Jump Diffusion Process
next chapter Efficient Calibration and Pricing in LIBOR Market Models with SABR Stochastic Volatility Using GPUs
Literature
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Ševčovič, D.: Transformation methods for evaluating approximations to the optimal exercise boundary for linear and nonlinear Black-Scholes equations. In: Nonlinear Models in Mathematical Finance: New Research Trends in Option Pricing, pp. 173–218. Nova Science Publishers Inc., New York (2008)
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Metadata
Title
A Positive, Stable and Consistent Front-Fixing Numerical Scheme for American Options
Authors
R. Company
V. N. Egorova
L. Jódar
Copyright Year
2016
Book
Progress in Industrial Mathematics at ECMI 2014

Print ISBN: 978-3-319-23412-0

Electronic ISBN: 978-3-319-23413-7

Copyright Year: 2016

DOI
https://doi.org/10.1007/978-3-319-23413-7_10

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