An ETD Method for Vulnerable American Options

Autor:	Rafael Company, Vera N. Egorova, Lucas Jódar
Jazyk:	angličtina
Rok vydání:	2024
Předmět:	vulnerable options default risk exponential time differencing penalty method Mathematics QA1-939
Zdroj:	Mathematics, Vol 12, Iss 4, p 602 (2024)
Druh dokumentu:	article
ISSN:	2227-7390
DOI:	10.3390/math12040602
Popis:	This paper introduces the exponential time differencing (ETD) technique as a numerical method to efficiently solve vulnerable American options pricing. We address several challenges, including removing cross-derivative terms through appropriate transformations, treating early-exercise opportunities using the penalty method, and substituting fixed boundary conditions with corresponding one-sided finite differences. The proposed method is shown to be both accurate and efficient through numerical experiments, which also compare the results with existing methods and analyze the numerical stability and convergence rate.
Databáze:	Directory of Open Access Journals
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