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Numerical Methods for Pricing American Put Options

In: Quantitative Methods for Finance with Simulations II

Author

Listed:
  • Geon Ho Choe

    (Korea Advanced Institute of Science and Technology, Department of Mathematical Sciences)

Abstract

In this chapter we compute numerically the prices of American put options, and find the optimal exercise boundary, which is a free boundary not given explicitly in the problem. First, as a motivation we introduce a free boundary problem for ice melting, called the Stefan problem, and extend the idea to the main subject of pricing American put options. Since the Black–Scholes–Merton equation is essentially a heat equation, one may build helpful intuition for option pricing by studying the ice melting problem.

Suggested Citation

  • Geon Ho Choe, 2026. "Numerical Methods for Pricing American Put Options," Springer Texts in Business and Economics, in: Quantitative Methods for Finance with Simulations II, chapter 0, pages 117-145, Springer.
    • Handle: RePEc:spr:sptchp:978-3-032-12331-2_7
    DOI: 10.1007/978-3-032-12331-2_7
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