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Valuing American Put Options Using Chebyshev Polynomial Approximation

  • Guglielmo Maria Caporale


  • Mario Cerrato

This pa per suggests a simple valuation method based on Chebyshev approximation at Chebyshev nodes to value American put options. It is similar to the approach taken in Sullivan (2000), where the option`s continuation region function is estimated by using a Chebyshev polynomial. However, in contrast to Sullivan (2000), the functional is fitted by using Chebyshev nodes. The suggested method is flexible, easy to program and efficient, and can be extended to price other types of derivative instruments. It is also applicable in other fields, providing efficient solutions to complex systems of partial differential equations. The paper also describes an alternative method based on dynamic programming and backward induction to approximate the option value in each time period.

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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 05-03.

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Length: 23 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:bru:bruedp:05-03
Contact details of provider: Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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