An efficient numerical method for the valuation of American multi-asset options

• DOI: 10.1007/s40314-020-01290-9
• Publication Date: 2020-08-11T10:29:02Z
• Authors: Qi Zhang; Haiming Song; Chengbo Yang; Fangfang Wu
• Keywords: 0101 mathematics; 01 natural sciences

In this paper, a fast and efficient numerical method which relies on the far field truncation technique, the finite element discretization, and the projection contraction method (PCM) is proposed for pricing American multi-asset options. It is well known that American multi-asset option satisfies a linear complementarity problem (LCP), which is a multi-dimensional variable coefficient parabolic model on an unbounded domain. First, we transform it into a constant coefficient parabolic LCP on a bounded domain by some skillful transformations and far-field boundary estimate. Then, the variational inequality (VI) corresponding to the truncated LCP is obtained. Further, it is discretized by the finite element method and the implicit difference method in spatial and temporal directions, respectively. Based on the symmetric positive definiteness of the full-discrete matrix, the discretized VI is solved by the PCM. Finally, numerical simulations are provided to verify the efficiency of the proposed method.