Accurate Numerical Method for Pricing Two-Asset American Put Options

Abstract EN

We develop an accurate finite difference scheme for pricing two-asset American put options.

We use the central difference method for space derivatives and the implicit Euler method for the time derivative.

Under certain mesh step size limitations, the matrix associated with the discrete operator is an M-matrix, which ensures that the solutions are oscillation-free.

We apply the maximum principle to the discrete linear complementarity problem in two mesh sets and derive the error estimates.

It is shown that the scheme is second-order convergent with respect to the spatial variables.

Numerical results support the theoretical results.