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Pricing of American options, using the Brennan–Schwartz algorithm based on finite elements

Sofiane Madi, Mohamed Cherif Bouras, Mohamed Haiour and Andreas Stahel

Applied Mathematics and Computation, 2018, vol. 339, issue C, 846-852

Abstract: A finite element method and implicit time steps are used to determine the price of an American option. The algorithm of Brennan and Schwartz is adapted to this situation and we prove convergence. Numerical tests confirm the theoretical result and lead to a smaller error for the same computational effort, compared to the finite difference method.

Keywords: Finite element method; American option; Brennan–Schwartz; Parabolic variational inequalities (search for similar items in EconPapers)
Date: 2018
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