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

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  • Riccardo Fazio

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.

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  • Riccardo Fazio, 2015. "A Posteriori Error Estimator for a Front-Fixing Finite Difference Scheme for American Options," Papers 1504.04594, arXiv.org.
    • Handle: RePEc:arx:papers:1504.04594
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