Abstract: The goal of option pricing theory is to help the investors
to manage their money, enhance returns and control their financial
future by theoretically valuing their options. However, most of the
option pricing models have no analytical solution. Furthermore,
not all the numerical methods are efficient to solve these models
because they have nonsmoothing payoffs or discontinuous derivatives
at the exercise price. In this paper, we solve the American option
under jump diffusion models by using efficient time-dependent
numerical methods. several techniques are integrated to reduced
the overcome the computational complexity. Fast Fourier Transform
(FFT) algorithm is used as a matrix-vector multiplication solver,
which reduces the complexity from O(M2) into O(M logM).
Partial fraction decomposition technique is applied to rational
approximation schemes to overcome the complexity of inverting
polynomial of matrices. The proposed method is easy to implement
on serial or parallel versions. Numerical results are presented to prove
the accuracy and efficiency of the proposed method.
Abstract: Numerical methods like binomial and trinomial trees and finite difference methods can be used to price a wide range of options contracts for which there are no known analytical solutions. American options are the most famous of that kind of options. Besides numerical methods, American options can be valued with the approximation formulas, like Bjerksund-Stensland formulas from 1993 and 2002. When the value of American option is approximated by Bjerksund-Stensland formulas, the computer time spent to carry out that calculation is very short. The computer time spent using numerical methods can vary from less than one second to several minutes or even hours. However to be able to conduct a comparative analysis of numerical methods and Bjerksund-Stensland formulas, we will limit computer calculation time of numerical method to less than one second. Therefore, we ask the question: Which method will be most accurate at nearly the same computer calculation time?