A new predictor-corrector scheme for valuing American puts

作者：Zhu Song Ping^*; Zhang Jin

来源：Applied Mathematics and Computation, 2011, 217(9): 4439-4452.

DOI：10.1016/j.amc.2010.10.044

• American put options
• Predictor-corrector
• Finite difference method
• Free boundary problem

In this paper, we present a new numerical scheme, based on the finite difference method, to solve American put option pricing problems. Upon applying a Landau transform or the so-called front-fixing technique [19] to the Black-Scholes partial differential equation, a predictor-corrector finite difference scheme is proposed to numerically solve the nonlinear differential system. Through the comparison with Zhu's analytical solution [35], we shall demonstrate that the numerical results obtained from the new scheme converge well to the exact optimal exercise boundary and option values. The results of our numerical examples suggest that this approach can be used as an accurate and efficient method even for pricing other types of financial derivative with American-style exercise.

• 出版日期2011-1-1