A Robust Spectral Method for Pricing of American Put Options on Zero-Coupon Bonds

Abstract

American put options on a zero-coupon bond problem is reformulated as a linear complementarity problem of the option value and approximated by a nonlinear partial differential equation. The equation is solved by an exponential time differencing method combined with a barycentric Legendre interpolation and the Krylov projection algorithm. Numerical examples shows the stability and good accuracy of the method.