Numerical pricing of American put options on zero-coupon bonds

Authors:
Walter Allegretto;Yanping Lin;Hongtao Yang
Affiliations:
Department of Mathematical Sciences, University of Alberta, Edmonton, AB, Canada T6G 2G1;Department of Mathematical Sciences, University of Alberta, Edmonton, AB, Canada T6G 2G1;Department of Mathematics, University of Louisiana at Lafayette, Lafayette, LA
Venue:
Applied Numerical Mathematics
Year:
2003

Citing 2
Cited 3

An upwind numerical approach for an American and European option pricing model

Applied Mathematics and Computation
Finite Element Error Estimates for a Nonlocal Problem in American Option Valuation

SIAM Journal on Numerical Analysis

Evaluating American put options on zero-coupon bonds by a penalty method

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Pricing American bond options using a penalty method

Automatica (Journal of IFAC)
Pricing American bond options using a penalty method

Automatica (Journal of IFAC)

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Abstract

In this paper we study finite volume methods and finite element methods for American put options on zerocoupon bonds. Stability and convergence are established for both methods. Numerical examples show that our methods converge and provide very accurate options prices and early exercise interest rates for all parameter combinations. We also present an error indicator by which one can examine the accuracy of the approximate option prices and early exercise interest rates actually obtained by a numerical method and determine how fine a grid should be used to achieve the desired accuracy.