Constructing positive reliable numerical solution for American call options: a new front-fixing approach

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URI: http://hdl.handle.net/10902/18035
ISSN: 0377-0427
ISSN: 1879-1778
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Autoría
Company Rossi, Rafael; Egorova, VeraAutoridad Unican; Jódar Sánchez, Lucas
Fecha
2016-01-01
Derechos
© 2014. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Publicado en
Journal of Computational and Applied Mathematics, 2016, 291, 422-431
Editorial
Elsevier
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Palabras clave
American call option pricing
Finite difference scheme
Front-fixing transformation
Numerical analysis
Positivity
Resumen/Abstract
A new front-fixing transformation is applied to the Black?Scholes equation for the American call option pricing problem. The transformed non-linear problem involves homogeneous boundary conditions independent of the free boundary. The numerical solution by an explicit finite-difference method is positive and monotone. Stability and consistency of the scheme are studied. The explicit proposed method is compared with other competitive implicit ones from the points of view accuracy and computational cost.
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© 2014. This manuscript version is made available under the CC-BY-NC-ND 4.0 licenseExcepto si se señala otra cosa, la licencia del ítem se describe como © 2014. This manuscript version is made available under the CC-BY-NC-ND 4.0 license