Pricing American Options for Jump Diffusions by Iterating Optimal Stopping Problems for Diffusions

Details Pricing American Options for Jump Diffusions by Iterating Optimal Stopping Problems for Diffusions Pricing American Options for Jump Diffusions by Iterating Optimal Stopping Problems for Diffusions

2007-06-15

arxiv.org/abs/0706.2331v5

Computer Science

Computational Engineering, Finance, and Science

Key Words: Pricing derivatives, American options, jump diffusions, barrier options, finite difference methods

Scientific paper

We approximate the price of the American put for jump diffusions by a sequence of functions, which are computed iteratively. This sequence converges to the price function uniformly and exponentially fast. Each element of the approximating sequence solves an optimal stopping problem for geometric Brownian motion, and can be numerically computed using the classical finite difference methods. We prove the convergence of this numerical scheme and present examples to illustrate its performance.

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