Pricing of American Put options
Typ
Examensarbete för masterexamen
Program
Publicerad
2021
Författare
Johansson, Filip
Modellbyggare
Tidskriftstitel
ISSN
Volymtitel
Utgivare
Sammanfattning
Abstract
In this thesis we have compared two numerical methods for pricing an American
put option, the binomial model and a finite difference scheme. The two methods
have been compared with regard to accuracy and computational speed. Thus, the
best model is the one with the highest computational speed, which at the same time
generates accurate results. We compare their exercise boundaries, see how they are
affected by the amount of iterations and grid size, and analyze the theory behind
the two methods. Since option pricing depends on market parameters, the methods
have been compared multiple times, for different market parameters to obtain a
complete comparison for multiple aspects. The thesis also includes the derivation
of the binomial model algorithm as well as the theorem and a sketch of the proof
for the boundary value problem of the partial differential equation used to price
American put options.