Abstract
In this paper, American put options on zero-coupon bonds are priced under a single factor model of short-term rate. The linear complementarity problem of the option value is solved numerically by a penalty method, by which the problem is transformed into a nonlinear PDE by adding a power penalty term. The solution of the penalized problem converges to that of the original problem. A numerical scheme is established by using the finite volume method and the corresponding stability and convergence are discussed. Numerical results are presented to show the usefulness of the method.
Original language | English |
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Pages (from-to) | 3921-3931 |
Number of pages | 11 |
Journal | Journal of Computational and Applied Mathematics |
Volume | 235 |
Issue number | 13 |
DOIs | |
Publication status | Published - 1 May 2011 |
Keywords
- American put option
- Finite volume method
- Linear complementarity problem
- Power penalty method
- Zero-coupon bond
ASJC Scopus subject areas
- Computational Mathematics
- Applied Mathematics