A new predictor-corrector scheme for valuing American puts
RIS ID
35535
Abstract
In this paper, we present a new numerical scheme, based on the finite difference method to solve American put option pricing problems. Upon applying a Landau transform of the so-called front-fixing technique to the Black-Scholes partial differential equation, a predictor-corrector finite difference scheme is proposed to numerically solve the nonlinear differential system. Through the comparison with Zhu's analytical solution we shall demonstrate that the numerical results obtained from the new scheme converge well to the exact optimal exercise boundary and option values. The results of a numerical examples suggest that this approach can be used as an accurate and efficient method even for pricing other types of financial derivative with American-style exercise.
Publication Details
Zhu, S. & Zhang, J. (2011). A new predictor-corrector scheme for valuing American puts. Applied Mathematics and Computation, 217 (9), 4439-4452.