Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
4640139 | Journal of Computational and Applied Mathematics | 2011 | 11 Pages |
Abstract
In this paper, American put options on zero-coupon bonds are priced under a single factor model of short-term rate. The linear complementarity problem of the option value is solved numerically by a penalty method, by which the problem is transformed into a nonlinear PDE by adding a power penalty term. The solution of the penalized problem converges to that of the original problem. A numerical scheme is established by using the finite volume method and the corresponding stability and convergence are discussed. Numerical results are presented to show the usefulness of the method.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Applied Mathematics
Authors
Hong Jun Zhou, Ka Fai Cedric Yiu, Leong Kwan Li,