An Efficient Method for Pricing American Options for Jump Diffusions

We approximate the price of the American put for jump diffusions by a sequence of functions, which are computed iteratively. This sequence converges to the price function uniformly and exponentially fast. Each element of the approximating sequence solves an optimal stopping problem for geometric Brownian motion, and can be numerically constructed using the classical finite difference methods. We present examples to illustrate our algorithm’s numerical performance.