Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/18005
Title: A power penalty approach to numerical solutions of two-asset American options
Authors: Zhang, K
Wang, S
Yang, XQ 
Teo, KL
Keywords: Complementarity problem
Option pricing
Penalty method
Finite volume method
Issue Date: 2009
Publisher: Global Science Press
Source: Numerical mathematics - theory methods and applications, 2009, v. 2, no. 2, p. 202-223 How to cite?
Journal: Numerical Mathematics-Theory Methods and Applications 
Abstract: This paper aims to develop a power penalty method for a linear parabolic variational inequality (VI) in two spatial dimensions governing the two-asset American option valuation. This method yields a two-dimensional nonlinear parabolic PDE containing a power penalty term with penalty constant lambda > 1 and a power parameter k > 0. We show that the nonlinear PDE is uniquely solvable and the solution of the PDE converges to that of the VI at the rate of order O(lambda(-k/2)). A fitted finite volume method is designed to solve the nonlinear PDE, and some numerical experiments are performed to illustrate the usefulness of this method.
URI: http://hdl.handle.net/10397/18005
ISSN: 1004-8979
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