Comparison of two numerical methods for computation of American type of the floating strike Asian option

DOI10.1007/978-3-642-29843-1_63zbMATH Open1354.91165arXiv1106.0020OpenAlexW1546777142MaRDI QIDQ2896445FDOQ2896445

Authors: J. D. Kandilarov, Daniel Ševčovič 

Publication date: 16 July 2012

Published in: Large-Scale Scientific Computing (Search for Journal in Brave)

Abstract: We present a numerical approach for solving the free boundary problem for the Black-Scholes equation for pricing American style of floating strike Asian options. A fixed domain transformation of the free boundary problem into a parabolic equation defined on a fixed spatial domain is performed. As a result a nonlinear time-dependent term is involved in the resulting equation. Two new numerical algorithms are proposed. In the first algorithm a predictor-corrector scheme is used. The second one is based on the Newton method. Computational experiments, confirming the accuracy of the algorithms are presented and discussed.

Full work available at URL: https://arxiv.org/abs/1106.0020

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Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Finite difference methods for initial value and initial-boundary value problems involving PDEs (65M06)

Cited In (4)

• Sensitivity analysis of the early exercise boundary for American style of Asian option
• Two splitting methods for a fixed strike Asian option
• Comparative study of numerical algorithms for the arithmetic Asian option
• Early Exercise Boundary for American Type of Floating Strike Asian Option and Its Numerical Approximation

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