Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing

Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing

This paper presents an explicit finite-difference method for nonlinear partial differential equation appearing as a transformed Black-Scholes equation for American put option under logarithmic front fixing transformation. Numerical analysis of the method is provided. The method preserves positivity...

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Main Authors: R. Company, V. N. Egorova, L. Jódar
Format: Article
Language:English
Published: Hindawi Limited 2014-01-01
Series:Abstract and Applied Analysis
Online Access:http://dx.doi.org/10.1155/2014/146745
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spelling doaj-f3f2c92e19d44cc3ad6f159ba2a8f03f2020-11-24T21:09:29ZengHindawi LimitedAbstract and Applied Analysis1085-33751687-04092014-01-01201410.1155/2014/146745146745Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and ComputingR. Company0V. N. Egorova1L. Jódar2Instituto de Matemática Multidisciplinar, Universitat Politécnica de València, Camino, de Vera s/n, 46022 Valencia, SpainInstituto de Matemática Multidisciplinar, Universitat Politécnica de València, Camino, de Vera s/n, 46022 Valencia, SpainInstituto de Matemática Multidisciplinar, Universitat Politécnica de València, Camino, de Vera s/n, 46022 Valencia, SpainThis paper presents an explicit finite-difference method for nonlinear partial differential equation appearing as a transformed Black-Scholes equation for American put option under logarithmic front fixing transformation. Numerical analysis of the method is provided. The method preserves positivity and monotonicity of the numerical solution. Consistency and stability properties of the scheme are studied. Explicit calculations avoid iterative algorithms for solving nonlinear systems. Theoretical results are confirmed by numerical experiments. Comparison with other approaches shows that the proposed method is accurate and competitive.http://dx.doi.org/10.1155/2014/146745
collection DOAJ
language English
format Article
sources DOAJ
author R. Company
V. N. Egorova
L. Jódar
spellingShingle R. Company
V. N. Egorova
L. Jódar
Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
Abstract and Applied Analysis
author_facet R. Company
V. N. Egorova
L. Jódar
author_sort R. Company
title Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
title_short Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
title_full Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
title_fullStr Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
title_full_unstemmed Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing
title_sort solving american option pricing models by the front fixing method: numerical analysis and computing
publisher Hindawi Limited
series Abstract and Applied Analysis
issn 1085-3375
1687-0409
publishDate 2014-01-01
description This paper presents an explicit finite-difference method for nonlinear partial differential equation appearing as a transformed Black-Scholes equation for American put option under logarithmic front fixing transformation. Numerical analysis of the method is provided. The method preserves positivity and monotonicity of the numerical solution. Consistency and stability properties of the scheme are studied. Explicit calculations avoid iterative algorithms for solving nonlinear systems. Theoretical results are confirmed by numerical experiments. Comparison with other approaches shows that the proposed method is accurate and competitive.
url http://dx.doi.org/10.1155/2014/146745
work_keys_str_mv AT rcompany solvingamericanoptionpricingmodelsbythefrontfixingmethodnumericalanalysisandcomputing
AT vnegorova solvingamericanoptionpricingmodelsbythefrontfixingmethodnumericalanalysisandcomputing
AT ljodar solvingamericanoptionpricingmodelsbythefrontfixingmethodnumericalanalysisandcomputing
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