On Numerical Methods and the Valuation of American Options

Mondher Bellaiah

Chapter Chapter 6 in Numerical Methods in Finance, 2005, pp 129-142 from Springer

Abstract: Abstract We study the valuation of index options in a stochastic interest rate economy with a composite volatility. We generalize Black and Scholes type models by including stochastic interest rates and proposing a decomposition of the underlying index volatility. We use the Crank — Nicholson numerical scheme in two space dimensions and extend the Alternating Direction Implicit method for the valuation of American options. We also provide an efficient algorithm and simulate Option values.

Keywords: Interest Rate; Option Price; Stock Index; American Option; Index Option (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-25118-9_6

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DOI: 10.1007/0-387-25118-9_6

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