TY - JOUR
ID - 4782
TI - An effective algorithm to solve option pricing problems
JO - International Journal of Nonlinear Analysis and Applications
JA - IJNAA
LA - en
SN -
AU - Moradipour, Mojtaba
AD - Department of Mathematics, Lorestan University, Khorramabad, Iran
Y1 - 2021
PY - 2021
VL - 12
IS - 1
SP - 261
EP - 271
KW - American options
KW - variational inequalities
KW - linear complementarity problems
DO - 10.22075/ijnaa.2021.4782
N2 - We are aimed to develop a fast and direct algorithm to solve linear complementarity problems (LCP's) arising from option pricing problems. We discretize the free boundary problem of American options in temporal direction and obtain a sequence of linear complementarity problems (LCP's) in the finite dimensional Euclidian space $mathbb{R}^m$. We develop a fast and direct algorithm based on the active set strategy to solve the LCP's. The active set strategy in general needs $O(2^m m^3)$ operations to solve $m$ dimensional LCP's. Using Thomas algorithm, we develop an algorithm with order of complexity $O(m)$ which can extremely speed up the computations.
UR - https://ijnaa.semnan.ac.ir/article_4782.html
L1 - https://ijnaa.semnan.ac.ir/article_4782_29d13b4a8016fe2587deba487d223462.pdf
ER -