Numerical techniques for the American put
Date
2008-12-11T10:00:51Z
Authors
Randell, Sean David
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Abstract
This dissertation considers an American put option written on a single underlying
which does not pay dividends, for which no closed form solution exists. As a conse-
quence, numerical techniques have been developed to estimate the value of the Amer-
ican put option. These include analytical approximations, tree or lattice methods,
¯nite di®erence methods, Monte Carlo simulation and integral representations. We
¯rst present the mathematical descriptions underlying these numerical techniques.
We then provide an examination of a selection of algorithms from each technique,
including implementation details, possible enhancements and a description of the
convergence behaviour. Finally, we compare the estimates and the execution times
of each of the algorithms considered.
Description
Keywords
analytical approximations, American put, Monte Carlo simulation, tree method, lattice method, numerical techniques