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Erschienen in: Decisions in Economics and Finance 2/2018

21.11.2018

Fast and accurate calculation of American option prices

verfasst von: Luca Vincenzo Ballestra

Erschienen in: Decisions in Economics and Finance | Ausgabe 2/2018

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Abstract

We propose a very efficient numerical method to solve a nonlinear partial differential problem that is encountered in the pricing of American options. In particular, by using the front-fixing approach originally developed in Wu and Kwok (J Financ Eng 6:83–97, 1997) and Nielsen et al. (J Comput Finance 5:69–97, 2002) in conjunction with a suitable change of the time variable, a (nonlinear) partial differential problem is obtained which can be solved very efficiently by means of a finite difference scheme enhanced by repeated Richardson extrapolation. Numerical results are presented showing that the novel algorithm yields excellent results, and performs significantly better than a finite different method with Bermudan approximation.
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Metadaten
Titel
Fast and accurate calculation of American option prices
verfasst von
Luca Vincenzo Ballestra
Publikationsdatum
21.11.2018
Verlag
Springer International Publishing
Erschienen in
Decisions in Economics and Finance / Ausgabe 2/2018
Print ISSN: 1593-8883
Elektronische ISSN: 1129-6569
DOI
https://doi.org/10.1007/s10203-018-0224-1

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