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

Author

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  • R. Company
  • V. N. Egorova
  • L. Jódar

Abstract

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.

Suggested Citation

  • R. Company & V. N. Egorova & L. Jódar, 2014. "Solving American Option Pricing Models by the Front Fixing Method: Numerical Analysis and Computing," Abstract and Applied Analysis, Hindawi, vol. 2014, pages 1-9, April.
    • Handle: RePEc:hin:jnlaaa:146745
    DOI: 10.1155/2014/146745
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    Citations

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    Cited by:

    1. Luca Vincenzo Ballestra, 2018. "Fast and accurate calculation of American option prices," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 399-426, November.
    2. Company, Rafael & Egorova, Vera N. & Jódar, Lucas, 2021. "A front-fixing ETD numerical method for solving jump–diffusion American option pricing problems," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 189(C), pages 69-84.
    3. Vynnycky, M., 2023. "On boundary immobilization for one-dimensional Stefan-type problems with a moving boundary having initially parabolic-logarithmic behaviour," Applied Mathematics and Computation, Elsevier, vol. 444(C).
    4. María Consuelo Casabán & Rafael Company & Vera N. Egorova & Lucas Jódar, 2023. "Qualitative Numerical Analysis of a Free-Boundary Diffusive Logistic Model," Mathematics, MDPI, vol. 11(6), pages 1-19, March.
    5. Chinonso Nwankwo & Weizhong Dai, 2020. "An Adaptive and Explicit Fourth Order Runge-Kutta-Fehlberg Method Coupled with Compact Finite Differencing for Pricing American Put Options," Papers 2007.04408, arXiv.org, revised Jul 2021.
    6. Rafael Company & Vera N. Egorova & Lucas Jódar, 2024. "An ETD Method for Vulnerable American Options," Mathematics, MDPI, vol. 12(4), pages 1-14, February.
    7. Chinonso Nwankwo & Nneka Umeorah & Tony Ware & Weizhong Dai, 2022. "Deep learning and American options via free boundary framework," Papers 2211.11803, arXiv.org, revised Dec 2022.

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