Projection and Contraction Method for Pricing American Bond Options

Author:

Zhang Qi1ORCID,Wang Qi1,Zuo Ping2,Du Hongbo1,Wu Fangfang1

Affiliation:

1. School of Science, Shenyang University of Technology, Shenyang 110870, China

2. School of New Energy and Intelligent Networked Automobile, University of Sanya, Sanya 572022, China

Abstract

In this paper, an effective numerical method is proposed for a linear complementarity problem (LCP) arising in the valuation of American bond options under the Cox–Ingersoll–Ross (CIR) model. Firstly, a variable substitution is used to simplify the linear complementary model. Secondly, the finite difference method is adopted to discretize the simplified model, and an equivalent variational form is obtained. Based on the positive definiteness of the discretized matrix, a projection and contraction method (PCM) is adopted for the resulting discretized variational problem. Finally, numerical experiments highlight the effectiveness and performance of the proposed algorithm.

Funder

education department project of Liaoning Province

talent introduction program of University of Sanya

Publisher

MDPI AG

Subject

General Mathematics,Engineering (miscellaneous),Computer Science (miscellaneous)

Reference31 articles.

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