A Posteriori Error Estimator for a Front-Fixing Finite Difference Scheme for American Options

Riccardo Fazio

Papers from arXiv.org

Abstract: For the numerical solution of the American option valuation problem, we provide a script written in MATLAB implementing an explicit finite difference scheme. Our main contribute is the definition of a posteriori error estimator for the American options pricing which is based on Richardson's extrapolation theory. This error estimator allows us to find a suitable grid where the computed solution, both the option price field variable and the free boundary position, verify a prefixed error tolerance.

Date: 2015-04
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