Front-Tracking Finite Difference Methods for the Valuation of American Options

K N Pantazopoulos, E N Houstis and S Kortesis

Computational Economics, 1998, vol. 12, issue 3, 255-73

Abstract: This paper is concerned with the numerical solution of the American option valuation problem formulated as a parabolic free boundary/initial value model. We introduce and analyze a front-tracking finite difference method and compare it with other commonly used techniques. The numerical experiments performed indicate that the front-tracking method considered is an efficient alternative for approximating simultaneously the option value and free boundary functions associated with the valuation problem. Citation Copyright 1998 by Kluwer Academic Publishers.

Date: 1998
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