Abstract:

We proposed a predictioncorrection method for pricing American options. We transformed the option pricing problem into a linear complementary problem on a bounded domain via variable substitution and truncation technique, and discretized it via a finite difference method. For the resulting discretized system was solved by a predictioncorrection method. Numerical experiments show that the proposed method can solve the American option pricing problem fast and accurately.

Key words: American option, finite difference method, predictioncorrection method