A Numerical Method for American Option Pricing under CEV

J. Zhao and H.Y. Wong (PRC)


American option, Artificial boundary, Numerical PDE


The Black-Scholes asset price dynamics is well known to be inadequate to capture the volatility smile in the finan cial market. Since then, the constant elasticity of variance (CEV) model has been a popular alternative to fit the smile. American option pricing under CEV is however computa tionally intensive as there is no analytical formulas avail able. This paper proposes an artificial boundary method for partial differential equations to compute American op tion prices and its Greeks under the CEV model. The idea is to reduce the infinite computational domain to a finite one by introducing an artificial boundary so that the opti mal exercise boundary can efficiently be detected. Several numerical examples are given.

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