Numerical Methods for Pricing American Put Options

Geon Ho Choe
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Geon Ho Choe: Korea Advanced Institute of Science and Technology, Department of Mathematical Sciences

Chapter Chapter 7 in Quantitative Methods for Finance with Simulations II, 2026, pp 117-145 from Springer

Abstract: Abstract In this chapter we compute numerically the prices of American put options, and find the optimal exercise boundary, which is a free boundary not given explicitly in the problem. First, as a motivation we introduce a free boundary problem for ice melting, called the Stefan problem, and extend the idea to the main subject of pricing American put options. Since the Black–Scholes–Merton equation is essentially a heat equation, one may build helpful intuition for option pricing by studying the ice melting problem.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-032-12331-2_7

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DOI: 10.1007/978-3-032-12331-2_7

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