Enhanced Finite-Difference Techniques for Early-Exercise Options on Single and Multiple Underlyings
31 Pages Posted: 23 Aug 2007
Date Written: August 17, 2007
This paper develops improvements to existing finite-difference methods for pricing derivatives (on single and also multiple underlying factors) which contain early-exercise features. Both fixed-grid methods (based on Projected Successive Over Relaxation) and moving-grid methods (based on boundary-fitted coordinates), are considered exploiting some prior (but limited) knowledge of the topology of the pricing in time and underlying price(s). These techniques can be quite readily applied to ensure pricing is both highly accurate and very efficient.
Keywords: American options, multi asset, finite difference, PSOR
JEL Classification: C63
Suggested Citation: Suggested Citation