A front‐fixing method for American option pricing on zero‐coupon bond under the Hull and White model

Autor:	Rafael Company, Vera N. Egorova, Lucas Jódar, Jorge Peris
Přispěvatelé:	Universidad de Cantabria
Rok vydání:	2021
Předmět:	White (horse) General Mathematics General Engineering Zero-coupon bond Finite difference method American option pricing Valuation of options Hull Numerical simulations Applied mathematics Front-fixing method MATEMATICA APLICADA Front (military) Mathematics
Zdroj:	Mathematical Methods in the Applied Sciences, 2022, 45(6), 3334-3344 UCrea Repositorio Abierto de la Universidad de Cantabria Universidad de Cantabria (UC)
ISSN:	1099-1476 0170-4214
DOI:	10.1002/mma.7505
Popis:	[EN] A new efficient numerical method is proposed for valuation of American option on zero-coupon bond using Hull and White model. By applying the front-fixing transformation suggested by Holmes and Yang, the original free boundary problem is transformed into a new fixed boundary partial differential equation (PDE) problem, where the optimal stopping boundary is one of the unknowns of the problem. The numerical finite difference scheme for the transformed problem is constructed. Stability and convergence rate is studied empirically. Numerical simulation of the computation of both the option price and the optimal stopping boundary are illustrated with examples and the comparison with the Hull and White tree method. Ministerio de Ciencia e Innovacion, Grant/Award Number: MTM2017-89664-P
Databáze:	OpenAIRE
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