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A Finite Difference Scheme for Pricing American Put Options under Kou's Jump-Diffusion Model
Joint Authors
Cen, Zhongdi
Huang, Jian
Le, Anbo
Source
Journal of Function Spaces and Applications
Issue
Vol. 2013, Issue 2013 (31 Dec. 2013), pp.1-11, 11 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2013-02-07
Country of Publication
Egypt
No. of Pages
11
Main Subjects
Abstract EN
We present a stable finite difference scheme on a piecewise uniform mesh along with a penalty method for pricing American put options under Kou's jump-diffusion model.
By adding a penalty term, the partial integrodifferential complementarity problem arising from pricing American put options under Kou's jump-diffusion model is transformed into a nonlinear parabolic integro-differential equation.
Then a finite difference scheme is proposed to solve the penalized integrodifferential equation, which combines a central difference scheme on a piecewise uniform mesh with respect to the spatial variable with an implicit-explicit time stepping technique.
This leads to the solution of problems with a tridiagonal M-matrix.
It is proved that the difference scheme satisfies the early exercise constraint.
Furthermore, it is proved that the scheme is oscillation-free and is second-order convergent with respect to the spatial variable.
The numerical results support the theoretical results.
American Psychological Association (APA)
Huang, Jian& Cen, Zhongdi& Le, Anbo. 2013. A Finite Difference Scheme for Pricing American Put Options under Kou's Jump-Diffusion Model. Journal of Function Spaces and Applications،Vol. 2013, no. 2013, pp.1-11.
https://search.emarefa.net/detail/BIM-488328
Modern Language Association (MLA)
Huang, Jian…[et al.]. A Finite Difference Scheme for Pricing American Put Options under Kou's Jump-Diffusion Model. Journal of Function Spaces and Applications No. 2013 (2013), pp.1-11.
https://search.emarefa.net/detail/BIM-488328
American Medical Association (AMA)
Huang, Jian& Cen, Zhongdi& Le, Anbo. A Finite Difference Scheme for Pricing American Put Options under Kou's Jump-Diffusion Model. Journal of Function Spaces and Applications. 2013. Vol. 2013, no. 2013, pp.1-11.
https://search.emarefa.net/detail/BIM-488328
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-488328