Pricing American options using a space-time adaptive finite difference method

Authors:
Jonas Persson;Lina von Sydow
Affiliations:
Department of Information Technology, Uppsala University, Box 337, SE-751 05 Uppsala, Sweden;Department of Information Technology, Uppsala University, Box 337, SE-751 05 Uppsala, Sweden
Venue:
Mathematics and Computers in Simulation
Year:
2010

Citing 5
Cited 0

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Space-time adaptive finite difference method for European multi-asset options

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Pricing European multi-asset options using a space-time adaptive FD-method

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Abstract

American options are priced numerically using a space- and time-adaptive finite difference method. The generalized Black-Scholes operator is discretized on a Cartesian structured but non-equidistant grid in space. The space- and time-discretizations are adjusted such that a predefined tolerance level on the local discretization error is met. An operator splitting technique is used to separately handle the early exercise constraint and the solution of linear systems of equations from the finite difference discretization of the linear complementarity problem. In numerical experiments three variants of the adaptive time-stepping algorithm with and without local time-stepping are compared.