Abstract
We present a transformation that helps price American options on assets that are modeled by a diffusion as well as a jump component. The presence of a jump component circumvents some shortcomings of the Black–Scholes model. The proposed transformation essentially transforms the arising free-boundary partial integro-differential equation (PIDE) into a sequence of fixed-boundary PIDEs which are much easier to solve. Finally, we provide numerical results illustrating convergence of the scheme and comparisons to other methods.
Original language | English |
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Pages (from-to) | 82-86 |
Number of pages | 5 |
Journal | Operations Research Letters |
Volume | 38 |
Issue number | 2 |
DOIs | |
Publication status | Published - 2010 |
Externally published | Yes |