previous up next SYLLABUS  Previous: 6.1.3 Application  Up: 6 AMERICAN OPTION PAYOFF  Next: 6.2.1 The Black-Scholes equation


6.2 Methods for American options: finite elements (FEM)

What appears to be a minor extension of the European contract results in considerable mathematical difficulties: so much in fact, that an explicit and exact pricing formula cannot anymore be found analytically. Fortunately, the variational calculus introduced in sect.5.3.1 to implement the finite element method provides a solid theoretical framework that can be extended to obtain a numerical solution with only minor changes to account for the difference in the European and American exercise styles.



Subsections

      
back up next contents bibliography Copyright © Lifelong-learners at 18:48:16, November 18th, 2017