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Handbook of Computational Economics by Kenneth L. Judd, Karl Schmedders

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Chapter 5

Computational Methods for Derivatives with Early Exercise Features

Carl Chiarellaa, Boda Kangb, Gunter Meyerc and Andrew Ziogasd,    aFinance Discipline Group, UTS Business School, University of Technology, Sydney, Australia,    bDepartment of Mathematics, University of York, Heslington, York, UK,    cDepartment of Mathematics, Georgia Institute of Technology, Atlanta, GA, USA,    dLloyds Bank – Commercial Banking, Sydney, Australia

Abstract

In this paper we consider various computational methods for pricing American style derivatives. We do so under both jump diffusion and stochastic volatility processes. We consider integral transform methods, the method of lines, operator-splitting, and the Crank-Nicolson scheme, the latter being ...

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