Front-Tracking Finite Difference Methods for the Valuation of American Options

Authors:
K. N. Pantazopoulos;E. N. Houstis;S. Kortesis
Affiliations:
Computer Sciences Department, Purdue University, W. Lafayette, IN 47907, USA, e-mail: kp@cs.purdue.edu;Computer Sciences Department, Purdue University, W. Lafayette, IN 47907, USA, e-mail: enh@cs.purdue.edu;General Department, Faculty of Technology, Aristotle University of Thessaloniki, Greece, e-mail: stk@vergina.eng.auth.gr
Venue:
Computational Economics - Special issue on numerical methods in economics and finance
Year:
1998

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Abstract

This paper is concerned with the numerical solution of the Americanoption valuation problem formulated as a parabolic free boundary/initialvalue model. We introduce and analyze a front-tracking finite differencemethod and compare it with other commonly used techniques. The numericalexperiments performed indicate that the front-tracking method considered isan efficient alternative for approximating simultaneously the option valueand free boundary functions associated with the valuation problem.