Application of the singularity-separating method to American exotic option pricing. (English) Zbl 1042.91029

Zhu, You-lan; Chen, Bin-mu; Ren, Hongliang; Xu, Hanping

Adv. Comput. Math. 19, No. 1-3, 147-158 (2003).

It is known that the European down-and-out call option can be evaluated (solved) by solving a partial differential equation (PDE) with two boundary conditions. Indeed, the value of such an option can be represented in closed form. This paper develops a solution technique for the corresponding American option. Although no closed form solution to the resulting PDE exists, the option value is computable and some computational results are included.

Reviewer: Roy Gardner (Bloomington)

MSC:

91B24

Microeconomic theory (price theory and economic markets)

Keywords:

computational finance; finite difference methods; American option pricing; European option