Comparison of Two Numerical Methods for Computation of American Type of the Floating Strike Asian Option

Details Comparison of Two Numerical Methods for Computation of American Type of the Floating Strike Asian Option Comparison of Two Numerical Methods for Computation of American Type of the Floating Strike Asian Option

2011-05-31

arxiv.org/abs/1106.0020v1

Economy

Quantitative Finance

Computational Finance

Scientific paper

We present a numerical approach for solving the free boundary problem for the Black-Scholes equation for pricing American style of floating strike Asian options. A fixed domain transformation of the free boundary problem into a parabolic equation defined on a fixed spatial domain is performed. As a result a nonlinear time-dependent term is involved in the resulting equation. Two new numerical algorithms are proposed. In the first algorithm a predictor-corrector scheme is used. The second one is based on the Newton method. Computational experiments, confirming the accuracy of the algorithms are presented and discussed.

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