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

DOI10.1017/S1446181110000854zbMATH Open1216.35182arXiv1002.0979OpenAlexW3124304278MaRDI QIDQ2996867FDOQ2996867

Authors: M. Lauko, Daniel Ševčovič 

Publication date: 4 May 2011

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

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.

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

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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)

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Cited In (21)

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• Semi-analytic valuation of stock loans with finite maturity
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• A simple approximation formula for calculating the optimal exercise boundary of American puts
• An asymptotic computational method for the nonlinear weakly singular integral models in option pricing
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• A METHOD FOR PRICING AMERICAN OPTIONS USING SEMI‐INFINITE LINEAR PROGRAMMING
• Area estimation between the early exercise boundaries for the American put option with different local volatilities
• Analytical and Numerical Results for American Style of Perpetual Put Options Through Transformation into Nonlinear Stationary Black-Scholes Equations
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• Early Exercise Boundary for American Type of Floating Strike Asian Option and Its Numerical Approximation
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