An Iterative Method for Pricing American Options under Jump-Diffusion Models

@inproceedings{Salmi2010AnIM,
  title={An Iterative Method for Pricing American Options under Jump-Diffusion Models},
  author={Santtu Salmi and Jari Toivanen},
  year={2010}
}
We propose an iterative method for pricing American options under jumpdiffusion models. A finite difference discretization is performed on the partial integro-differential equation, and the American option pricing problem is formulated as a linear complementarity problem (LCP). Jump-diffusion models include an integral term, which causes the resulting system to be dense. We propose an iteration to solve the LCPs efficiently and prove its convergence. Numerical examples with Kou’s and Merton’s… CONTINUE READING

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