A Simple Numerical Method for Pricing an American Put Option | Zendy

Beom Jin Kim | Zendy; Yong-Ki Ma | Zendy; Hi Jun Choe | Zendy

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A Simple Numerical Method for Pricing an American Put Option

Author(s) -

Beom Jin Kim,

Yong-Ki Ma,

Hi Jun Choe

Publication year - 2013

Publication title -

journal of applied mathematics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.307

H-Index - 43

eISSN - 1687-0042

pISSN - 1110-757X

DOI - 10.1155/2013/128025

Subject(s) - simple (philosophy) , boundary (topology) , lipschitz continuity , quadratic equation , mathematics , mathematical optimization , function (biology) , numerical analysis , boundary value problem , computer science , mathematical analysis , geometry , philosophy , epistemology , evolutionary biology , biology

We present a simple numerical method to find the optimal exercise boundary in an American put option. We formulate an intermediate function with the fixed free boundary that has Lipschitz character near optimal exercise boundary. Employing it, we can easily determine the optimal exercise boundary by solving a quadratic equation in time-recursive way. We also present several numerical results which illustrate a comparison to other methods

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