Numerical Contour Integral Methods for Free-Boundary Partial Differential Equations Arising in American Volatility Options Pricing

<div>Early exercise boundaries (left) under GBMP model with <svg height="11.439pt" id="M332" style="vertical-align:-2.15067pt" version="1.1" viewbox="-0.0498162 -9.28833 38.8413 11.439" width="38.8413pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M620 675H597C578 656 570 650 541 650H144C112 650 104 653 94 675H72C59 618 42 552 23 493L53 491C71 534 88 564 105 585C124 608 144 615 238 615H290L197 121C182 40 174 34 88 28L82 0H361L367 28C275 34 266 38 281 121L374 615H441C522 615 543 608 553 583C562 560 566 531 565 493L597 494C603 551 612 629 620 675Z"></path></g><g transform="matrix(.013,0,0,-0.013,8.285,0)"><path d="M368 703H309L44 -163H104L368 703Z"></path></g><g transform="matrix(.013,0,0,-0.013,13.646,0)"><path d="M412 140C382 77 369 73 315 73H129L270 222C362 320 402 379 402 466C402 571 322 635 234 635C177 635 130 609 99 576L42 495L64 475C90 514 133 568 201 568C274 568 318 519 318 435C318 349 255 267 193 193C144 135 87 78 32 23V0H405C417 45 427 89 440 131L412 140Z"></path></g><g transform="matrix(.013,0,0,-0.013,19.886,0)"><path d="M241 635C89 635 35 457 35 312C35 153 89 -12 240 -12C390 -12 443 166 443 312C443 466 390 635 241 635ZM238 602C329 602 354 454 354 312C354 172 330 22 240 22C152 22 124 173 124 313S148 602 238 602Z"></path></g><g transform="matrix(.013,0,0,-0.013,26.126,0)"><path d="M241 635C89 635 35 457 35 312C35 153 89 -12 240 -12C390 -12 443 166 443 312C443 466 390 635 241 635ZM238 602C329 602 354 454 354 312C354 172 330 22 240 22C152 22 124 173 124 313S148 602 238 602Z"></path></g><g transform="matrix(.013,0,0,-0.013,32.366,0)"><path d="M241 635C89 635 35 457 35 312C35 153 89 -12 240 -12C390 -12 443 166 443 312C443 466 390 635 241 635ZM238 602C329 602 354 454 354 312C354 172 330 22 240 22C152 22 124 173 124 313S148 602 238 602Z"></path></g></svg> for FDM and <svg height="8.68572pt" id="M333" style="vertical-align:-0.0498209pt" version="1.1" viewbox="-0.0498162 -8.6359 34.7657 8.68572" width="34.7657pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M541 160L512 170C485 116 462 88 439 67C411 41 376 35 318 35C272 35 238 37 224 48C207 61 205 85 212 121L290 533C305 611 308 615 391 622L397 650H139L133 622C217 615 221 612 206 533L126 118C111 41 103 34 23 26L17 0H474C489 31 528 124 541 160Z"></path></g><g transform="matrix(.013,0,0,-0.013,10.817,0)"><path d="M535 323V373H52V323H535ZM535 138V188H52V138H535Z"></path></g><g transform="matrix(.013,0,0,-0.013,22.08,0)"><path d="M384 0V27C293 34 287 42 287 114V635C232 613 172 594 109 583V559L157 557C201 555 205 550 205 499V114C205 42 199 34 109 27V0H384Z"></path></g><g transform="matrix(.013,0,0,-0.013,28.32,0)"><path d="M456 178V225H360V632H320C217 496 115 347 20 206V178H280V106C280 40 276 34 189 27V0H445V27C364 34 360 39 360 106V178H456ZM280 225H82C149 335 214 431 278 520H280V225Z"></path></g></svg> for NCIM, NCIM errors in log-scale versus <svg height="8.68572pt" id="M334" style="vertical-align:-0.0498209pt" version="1.1" viewbox="-0.0498162 -8.6359 7.31558 8.68572" width="7.31558pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M541 160L512 170C485 116 462 88 439 67C411 41 376 35 318 35C272 35 238 37 224 48C207 61 205 85 212 121L290 533C305 611 308 615 391 622L397 650H139L133 622C217 615 221 612 206 533L126 118C111 41 103 34 23 26L17 0H474C489 31 528 124 541 160Z"></path></g></svg> (right).</div>

Discrete Dynamics in Nature and Society

fig2

Figure 2

Figure 2: Numerical Contour Integral Methods for Free-Boundary Partial Differential Equations Arising in American Volatility Options Pricing 