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Journal of Function Spaces and Applications
Volume 2013, Article ID 189235, 7 pages
http://dx.doi.org/10.1155/2013/189235
Research Article

Accurate Numerical Method for Pricing Two-Asset American Put Options

Junior College, Zhejiang Wanli University, Ningbo 315100, China

Received 12 October 2012; Accepted 27 November 2012

Academic Editor: Manuel Ruiz Galan

Copyright © 2013 Xianbin Wu. 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.

Abstract

We develop an accurate finite difference scheme for pricing two-asset American put options. We use the central difference method for space derivatives and the implicit Euler method for the time derivative. Under certain mesh step size limitations, the matrix associated with the discrete operator is an M-matrix, which ensures that the solutions are oscillation-free. We apply the maximum principle to the discrete linear complementarity problem in two mesh sets and derive the error estimates. It is shown that the scheme is second-order convergent with respect to the spatial variables. Numerical results support the theoretical results.