Using a meshless kernel-based method to solve the Black–Scholes variational inequality of American options
Journal Article
·
· Computational and Applied Mathematics
Under the Black–Scholes model, the value of an American option solves a free boundary problem which is equivalent to a variational inequality problem. Using positive definite kernels, we discretize the variational inequality problem in spatial direction and derive a sequence of linear complementarity problems (LCPs) in a finite-dimensional euclidean space. We use special kind of kernels to impose homogeneous boundary conditions and to obtain LCPs with positive definite coefficient matrices to guarantee the existence and uniqueness of the solution. The LCPs are then successfully solved iteratively by the projected SOR algorithm.
- OSTI ID:
- 22769380
- Journal Information:
- Computational and Applied Mathematics, Vol. 37, Issue 1; Other Information: Copyright (c) 2018 SBMAC - Sociedade Brasileira de Matemática Aplicada e Computacional; Country of input: International Atomic Energy Agency (IAEA); ISSN 0101-8205
- Country of Publication:
- United States
- Language:
- English
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