A Newton method for American option pricing
نویسندگان
چکیده
منابع مشابه
A Newton Method for American Option Pricing
The variational inequality formulation provides a mechanism to determine both the option value and the early exercise curve implicitly [17]. Standard finite difference approximation typically leads to linear complementarity problems with tridiagonal coefficient matrices. The second order upwind finite difference formulation gives rise to finite dimensional linear complementarity problems with n...
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We present a simple numerical method to find the optimal exercise boundary in an American put option. We formulate an intermediate function with the fixed free boundary that has Lipschitz character near optimal exercise boundary. Employing it, we can easily determine the optimal exercise boundary by solving a quadratic equation in time-recursive way. We also present several numerical results wh...
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The model for pricing of American option gives rise to a parabolic variational inequality. We first use penalty function approach to reformulate it as an equality problem. Since the problem is defined on an unbounded domain, we truncate it to a bounded domain and discuss error due to truncation and penalization. Finite element method is then applied to the penalized problem on the truncated dom...
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ژورنال
عنوان ژورنال: The Journal of Computational Finance
سال: 2002
ISSN: 1460-1559
DOI: 10.21314/jcf.2002.085