Valuation of American Continuous-Installment Options

We present three approaches to value American continuous-installment options written on assets without dividends or with continuous dividend yield. In an American continuous-installment option, the premium is paid continuously instead of up-front. At or before maturity, the holder may terminate payments by either exercising the option or stopping the option contract. Under the usual assumptions, we are able to construct an instantaneous riskless dynamic hedging portfolio and derive an inhomogeneous Black–Scholes partial differential equation for the initial value of this option. This key result allows us to derive valuation formulas for American continuous-installment options using the integral representation method and consequently to obtain closed-form formulas by approximating the optimal stopping and exercise boundaries as multipiece exponential functions. This process is compared to the finite difference method to solve the inhomogeneous Black–Scholes PDE and a Monte Carlo approach.     

A front-fixing finite element method for the valuation of American options with regime switching

American option problems under regime-switching model are considered in this paper. The conjectures in [H. Yang, A numerical analysis of American options with regime switching, J. Sci. Comput. 44 (2010), pp. 69–91] about the position of early exercise prices are proved, which generalize the results in [F. Yi, American put option with regime-switching volatility (finite time horizon) – Variational inequality approach, Math. Methods. Appl. Sci. 31 (2008), pp. 1461–1477] by allowing the interest rates to be different in two states. A front-fixing finite element method for the free boundary problems is proposed and implemented. Its stability is established under reasonable assumptions. Numerical results are given to examine the rate of convergence of our method and compare it with the usual finite element method.     

Front-Tracking Finite Difference Methods for the Valuation of American Options

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.     

Multiscale methods for the valuation of American options with stochastic volatility

This paper deals with the efficient valuation of American options. We adopt Heston's approach for a model of stochastic volatility, leading to a generalized Black–Scholes equation called Heston's equation. Together with appropriate boundary conditions, this can be formulated as a parabolic boundary value problem with a free boundary, the optimal exercise price of the option. For its efficient numerical solution, we employ, among other multiscale methods, a monotone multigrid method based on linear finite elements in space and display corresponding numerical experiments.     

Valuation of electricity swing options by multistage stochastic programming

Electricity swing options are Bermudan-style path-dependent derivatives on electrical energy. We consider an electricity market driven by several exogenous risk factors and formulate the pricing problem for a class of swing option contracts with energy and power limits as well as ramping constraints. Efficient numerical solution of the arising multistage stochastic program requires aggregation of decision stages, discretization of the probability space, and reparameterization of the decision space. We report on numerical results and discuss analytically tractable limiting cases.     

Error bounds for complementarity problems with tridiagonal nonlinear functions

In this paper we consider the complementarity problem NCP(f) with f(x) = Mx + φ(x), where M ∈ R ^n×n is a real matrix and φ is a so-called tridiagonal (nonlinear) mapping. This problem occurs, for example, if certain classes of free boundary problems are discretized. We compute error bounds for approximations \({\hat x}\) to a solution x* of the discretized problems. The error bounds are improved by an iterative method and can be made arbitrarily small. The ideas are illustrated by numerical experiments.     

On splitting-based numerical methods for nonlinear models of European options

We present a large class of nonlinear models of European options as parabolic equations with quasi-linear diffusion and fully nonlinear hyperbolic part. The main idea of the operator splitting method (OSM) is to couple known difference schemes for nonlinear hyperbolic equations with other ones for quasi-linear parabolic equations. We use flux limiter techniques, explicit–implicit difference schemes, Richardson extrapolation, etc. Theoretical analysis for illiquid market model is given. The numerical experiments show second-order accuracy for the numerical solution (the price) and Greeks Delta and Gamma, positivity and monotonicity preserving properties of the approximations.     

Radial-basis-function-based finite difference operator splitting method for pricing American options

We present a new radial-basis-function (RBF)-based numerical method for pricing European and American option problems. The governing equation is time semi-discretized by a linear-implicit backward difference method. The spatial discretization is done by using the RBF-based finite difference method. The numerical scheme first derived for an European option is extended for American options by using an operator splitting method. Numerical experiments with multiquadric RBF for one- and two-asset option problems are carried out, and the results obtained are compared with the existing ones.     

Pricing American options using a space-time adaptive finite difference method

American options are priced numerically using a space- and time-adaptive finite difference method. The generalized Black–Scholes operator is discretized on a Cartesian structured but non-equidistant grid in space. The space- and time-discretizations are adjusted such that a predefined tolerance level on the local discretization error is met. An operator splitting technique is used to separately handle the early exercise constraint and the solution of linear systems of equations from the finite difference discretization of the linear complementarity problem. In numerical experiments three variants of the adaptive time-stepping algorithm with and without local time-stepping are compared.     

Application of fixed point-collocation method for solving an optimal control problem of a parabolic–hyperbolic free boundary problem modeling the growth of tumor with drug application

In this paper, employing a fixed point-collocation method, we solve an optimal control problem for a model of tumor growth with drug application. This model is a free boundary problem and consists of five time-dependent partial differential equations including three different first-order hyperbolic equations describing the evolution of cells and two second-order parabolic equations describing the diffusion of nutrient and drug concentration. In the mentioned optimal control problem, the concentration of nutrient and drug is controlled using some control variables in order to destroy the tumor cells. In this study, applying the fixed point method, we construct a sequence converging to the solution of the optimal control problem. In each step of the fixed point iteration, the problem changes to a linear one and the parabolic equations are solved using the collocation method. The stability of the method is also proved. Some examples are considered to illustrate the efficiency of method.     

On sign-changing solutions for a second-order integral boundary value problem

In this paper, we obtain the existence of sign-changing solutions for nonlinear second-order differential equations with integral boundary value conditions, by applying a new fixed point theorem in ordered Banach spaces, with the lattice structure derived by Liu and Sun. Our results improve on those in the literature.     

Shapes of liquid drops obtained using symbolic computation

The first aim of this paper is to show how two free boundary problems arising from fluid mechanics can be solved with a domain perturbation method. The second aim is to analyse the range of validity of the series solutions. The analysis will aim at identifying the location and the nature of the singularities characterizing these series. After expansion, the equations obtained are linear, but at each stage the length of the expressions grows exponentially. Herein we implement techniques for the automatic generation of hierarchical expression sequences and we present several tools for reducing the combinatorial blow-up of the expressions arising in these two problems.     

A regime-switching model with the volatility smile for two-asset European options

In this paper, we consider a numerical European-style option pricing method under two regime-switching underlying assets depending on the market regime. For a risk neutral market condition, we consider regime-switching model with two assets using a Feynman–Kac type formula. And to solve the option problem with regime-switching model, we apply an operator splitting method. Numerical examples show the volatility smile and the volatility term structure under varying parameters on a two state regime switching model.     

A new numerical method for pricing fixed-rate mortgages with prepayment and default options

In this paper we consider the valuation of fixed-rate mortgages including prepayment and default options, where the underlying stochastic factors are the house price and the interest rate. The mathematical model to obtain the value of the contract is posed as a free boundary problem associated to a partial differential equation (PDE) model. The equilibrium contract rate is determined by using an iterative process. Moreover, appropriate numerical methods based on a Lagrange–Galerkin discretization of the PDE, an augmented Lagrangian active set method and a Newton iteration scheme are proposed. Finally, some numerical results to illustrate the performance of the numerical schemes, as well as the qualitative and quantitative behaviour of solution and the optimal prepayment boundary are presented.     

A robust upwind difference scheme for pricing perpetual American put options under stochastic volatility

In this paper, we present an upwind difference scheme for the valuation of perpetual American put options, using Heston's stochastic volatility model. The matrix associated with the discrete operator is an M-matrix, which ensure that the scheme is stable. We apply the maximum principle to the discrete linear complementarity problem in two mesh sets and derive the error estimates. Numerical results support the theoretical results.     

The inverse electromagnetic shaping problem

The inverse problem concerning electromagnetic casting of molten metals consists of looking for an electric current density distribution such that the induced electromagnetic field makes a given mass of liquid metal acquire a predefined shape. This problem is formulated here as an optimization problem where the positions of a finite set of inductors are the design variables. Two different formulations for this optimization problem for the two-dimensional case are proposed. The first one minimizes the difference between the target and the equilibrium shapes while the second approach minimizes the L ² norm of a fictitious surface pressure that makes the target shape to be in mechanical equilibrium. The optimization problems are solved using Feasible Arc Interior Point Algorithm, a line search interior-point algorithm for nonlinear optimization. Some examples are presented to show the effectiveness of the proposed approaches.     

Stability analysis of a multi-layer tumor model with free boundary

In this paper we study a multi-layer tumor model which is expressed as a free boundary problem of a system of partial differential equations. The problem consists of two elliptic equations describing the distribution of nutrient concentration and the pressure between tumor cells, respectively, in an unbounded strip-like region in which the tumor occupies. This region has two disjoint boundaries: While the lower part is fixed, the upper part, which stands for the tumor surface, can move as the tumor grows. Under certain conditions, the problem can be proved to admit a unique equilibrium which corresponds to the flat upper boundary. We first convert the model into a parabolic differential equation in certain function space. Next we compute the spectrum of the linearized problem at the equilibrium. By applying the geometric theory of parabolic differential equations in Banach spaces, we prove that if the cell-to-cell adhesiveness coefficient $\gamma$ is larger than a threshold value ${\gamma }^1$, then the unique flat equilibrium is asymptotically stable, whereas in the case $0<\gamma <{\gamma }^1$ the flat equilibrium is unstable.     

Vague集相似度的积分表示

Chen犤1犦和李凡犤2犦分别研究了Vague集之间的相似度量。笔者也在文献犤3犦中定义了一种新的相似度量。但这些相似度量均定义在有限论域上,对无限论域的情况均未作讨论。该文给出了Vague集之间的相似度的统一概念,基于信息处理的背景,给出了论域X=犤a,b犦上Vague集之间相似度的积分表示,这些结果可以在模式识别、决策科学等领域中得到应用。