Front-Tracking Finite Difference Methods for the Valuation of American Options |
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| Authors: | K.N. Pantazopoulos E.N. Houstis S. Kortesis |
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| Affiliation: | (1) Computer Sciences Department, Purdue University, W. Lafayette, IN 47907, USA;(2) General Department, Faculty of Technology, Aristotle University of Thessaloniki, Greece |
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| Abstract: | This paper is concerned with the numerical solution of the American option valuation problem formulated as a parabolic free boundary/initial value model. We introduce and analyze a front-tracking finite difference method and compare it with other commonly used techniques. The numerical experiments performed indicate that the front-tracking method considered is an efficient alternative for approximating simultaneously the option value and free boundary functions associated with the valuation problem. |
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| Keywords: | American option valuation free boundary problems front-tracking methods option pricing finite difference method |
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