A New Howard–Crandall–Douglas Algorithm for the American Option Problem in Computational Finance

  • Nawdha Thakoor
  • Dhiren Kumar Behera
  • Désiré Yannick Tangman
  • Muddun BhuruthEmail author
Conference paper
Part of the Advances in Intelligent Systems and Computing book series (AISC, volume 711)


The unavailability of a closed-form formula for the American option price means that the price needs to be approximated by numerical techniques. The valuation problem can be formulated either as a linear complementarity problem or a free-boundary value problem. Both approaches require a discretisation of the associated partial differential equation, and it is common to employ standard second-order finite difference approximations. This work develops a new procedure for the linear complementarity formulation. Howard’s algorithm is used to solve the discrete problem obtained through a higher-order Crandall–Douglas discretisation. Speed and error comparisons indicate that this approach is more efficient than the procedures for solving the free-boundary value problem.


Computational finance American option Policy iteration Howard’s algorithm 


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Copyright information

© Springer Nature Singapore Pte Ltd. 2019

Authors and Affiliations

  • Nawdha Thakoor
    • 1
  • Dhiren Kumar Behera
    • 2
  • Désiré Yannick Tangman
    • 1
  • Muddun Bhuruth
    • 1
    Email author
  1. 1.Department of MathematicsUniversity of MauritiusReduitMauritius
  2. 2.Mechanical Engineering DepartmentIndira Gandhi Institute of Technology, SarangDhenkanalIndia

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