Comparison of numerical and analytical approximations of the early exercise boundary of American put options

DOI10.1017/S1446181110000854MaRDI QIDQ2996867zbMATH OpenOpenAlexFDO

Authors M. Lauko, Daniel Ševčovič

Publication date 4 May 2011

Published in The ANZIAM Journal (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1002.0979

zbMATH Keywords

option pricingAmerican put optionearly exercise boundarylimiting behaviour close to expiry

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Numerical methods (including Monte Carlo methods) (91G60) Statistical methods; risk measures (91G70) Free boundary problems for PDEs (35R35) Financial applications of other theories (91G80) Numerical methods for partial differential equations, initial value and time-dependent initial-boundary value problems (65M99)

Abstract: In this paper we present qualitative and quantitative comparison of various analytical and numerical approximation methods for calculating a position of the early exercise boundary of the American put option paying zero dividends. First we analyze their asymptotic behavior close to expiration. In the second part of the paper, we introduce a new numerical scheme for computing the entire early exercise boundary. The local iterative numerical scheme is based on a solution to a nonlinear integral equation. We compare numerical results obtained by the new method to those of the projected successive over relaxation method and the analytical approximation formula recently derived by Zhu.

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Cites work

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Cited in

(21)

• A new approach for pricing discounted American options
• Evaluating approximations to the optimal exercise boundary for American options
• A Mathematical Analysis of the Optimal Exercise Boundary for American Put Options
• A second-order Nyström-type discretization for the early-exercise curve of American put options
• On solutions of a partial integro-differential equation in Bessel potential spaces with applications in option pricing models
• CALCULATING THE EARLY EXERCISE BOUNDARY OF AMERICAN PUT OPTIONS WITH AN APPROXIMATION FORMULA
• Analytical pricing of American options
• A two-grid penalty method for American options
• Semi-analytic valuation of stock loans with finite maturity
• Pricing perpetual put options by the Black-Scholes equation with a nonlinear volatility function
• scientific article; zbMATH DE number 1998886 (Why is no real title available?)
• A simple approximation formula for calculating the optimal exercise boundary of American puts
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• Early exercise boundary of an American put
• A METHOD FOR PRICING AMERICAN OPTIONS USING SEMI‐INFINITE LINEAR PROGRAMMING
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• Finite maturity margin call stock loans
• Analytical and Numerical Results for American Style of Perpetual Put Options Through Transformation into Nonlinear Stationary Black-Scholes Equations
• BENCHOP -- the benchmarking project in option pricing
• Early Exercise Boundary for American Type of Floating Strike Asian Option and Its Numerical Approximation
• Fast and accurate calculation of American option prices

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