An ETD method for vulnerable American options
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...
| Autores: | , , |
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| Tipo de recurso: | artículo |
| Fecha de publicación: | 2024 |
| País: | España |
| Institución: | Universidad de Cantabria (UC) |
| Repositorio: | UCrea Repositorio Abierto de la Universidad de Cantabria |
| Idioma: | inglés |
| OAI Identifier: | oai:repositorio.unican.es:10902/32898 |
| Acceso en línea: | https://hdl.handle.net/10902/32898 |
| Access Level: | acceso abierto |
| Palabra clave: | Vulnerable options Default risk Exponential time differencing Penalty method |
| Sumario: | 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. |
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