Article
Version 1
Preserved in Portico This version is not peer-reviewed
An ETD Method for Vulnerable American Options
Version 1
: Received: 2 February 2024 / Approved: 2 February 2024 / Online: 4 February 2024 (17:17:24 CET)
A peer-reviewed article of this Preprint also exists.
Company, R.; Egorova, V.N.; Jódar, L. An ETD Method for Vulnerable American Options. Mathematics 2024, 12, 602. Company, R.; Egorova, V.N.; Jódar, L. An ETD Method for Vulnerable American Options. Mathematics 2024, 12, 602.
Abstract
This paper introduces the exponential time differencing (ETD) technique as a numerical method to solve efficiently American vulnerable options pricing. We address several challenges, including removing cross-derivative terms through appropriate transformations, treating early-exercise opportunities using the penalty method, and substituting fixed boundary conditions with corresponding one-sided finite differences. The proposed method is shown to be both accurate and efficient through numerical experiments, which also compare the results with existing methods and analyse the numerical stability and convergence rate.
Keywords
Vulnerable options; Default risk; Exponential Time Differencing; Penalty method
Subject
Computer Science and Mathematics, Computational Mathematics
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Comments (0)
We encourage comments and feedback from a broad range of readers. See criteria for comments and our Diversity statement.
Leave a public commentSend a private comment to the author(s)
* All users must log in before leaving a comment