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Partial Differential Equations pp 279–292Cite as

An Operator Splitting Method for Pricing American Options

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Part of the book series: Computational Methods in Applied Sciences ((COMPUTMETHODS,volume 16))

Summary

Pricing American options using partial (integro-)differential equation based methods leads to linear complementarity problems (LCPs). The numerical solution of these problems resulting from the Black-Scholes model, Kou’s jump-diffusion model, and Heston’s stochastic volatility model are considered. The finite difference discretization is described. The solutions of the discrete LCPs are approximated using an operator splitting method which separates the linear problem and the early exercise constraint to two fractional steps. The numerical experiments demonstrate that the prices of options can be computed in a few milliseconds on a PC.

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Author information

Authors and Affiliations

  1. Nordea Markets, FI-00020, Nordea, Finland

    Samuli Ikonen

  2. Department of Mathematical Information Technology, University of Jyväskylä, P.O. Box 35, Agora, FI-40014, Finland

    Jari Toivanen

Authors
  1. Samuli Ikonen
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  2. Jari Toivanen
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Editor information

Editors and Affiliations

  1. Department of Mathematics, University of Houston, USA

    Roland Glowinski

  2. Department of Mathematical Information Technology, University of Jyväskylä, Finland

    Pekka Neittaanmäki

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Ikonen, S., Toivanen, J. (2008). An Operator Splitting Method for Pricing American Options. In: Glowinski, R., Neittaanmäki, P. (eds) Partial Differential Equations. Computational Methods in Applied Sciences, vol 16. Springer, Dordrecht. https://doi.org/10.1007/978-1-4020-8758-5_16

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