Year: 2015
East Asian Journal on Applied Mathematics, Vol. 5 (2015), Iss. 1 : pp. 48–60
Abstract
An efficient numerical method is proposed for the valuation of American options via the Black-Scholes variational inequality. A far field boundary condition is employed to truncate the unbounded domain problem to produce the bounded domain problem with the associated variational inequality, to which our finite element method is applied. We prove that the matrix involved in the finite element method is symmetric and positive definite, and solve the discretized variational inequality by the projection and contraction method. Numerical experiments are conducted that demonstrate the superior performance of our method, in comparison with earlier methods.
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Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.4208/eajam.110914.301114a
East Asian Journal on Applied Mathematics, Vol. 5 (2015), Iss. 1 : pp. 48–60
Published online: 2015-01
AMS Subject Headings:
Copyright: COPYRIGHT: © Global Science Press
Pages: 13
Keywords: American option Black-Scholes variational inequality finite element method projection and contraction method.
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