, Volume 12, Issue 3, pp 255-273

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

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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.