An Efficient Numerical Approximation of the American Option Pricing Problem

This paper deals with developing an efficient numerical approximation of the American option pricing problem as a free boundary problem. The recently introduced artificial boundary conditions of Han and Wu [9] are also employed. In order to solve the problem, a finite difference method is applied. The research has also taken advantage of the numerical approximation of the free boundary near expiry. Comparing the results coming from this method with those of the former methods, this research has been able to increase the accuracy of the commonly used methods.

Keywords:

American option , Artificial boundary condition , Finite difference method , Free boundary approximation , Partial differential equations