com.imsl.test.example.math

Class FeynmanKacEx1

java.lang.Object

com.imsl.test.example.math.FeynmanKacEx1

public class FeynmanKacEx1
extends Object

Compares American vs European options on a vanilla put.

The value of the American Option on a Vanilla Put can be no smaller than its European counterpart. That is due to the American Option providing the opportunity to exercise at any time prior to expiration. This example compares this difference - or premium value of the American Option - at two time values using the Black-Scholes model. The example is based on Wilmott et al. (1996, p. 176), and uses the non-linear forcing or weighting term described in Hanson, R. (2008), for evaluating the price of the American Option. The coefficients, payoff, boundary conditions and forcing term for American and European options are defined through interfaces PdeCoefficients, Boundaries and ForcingTerm, respectively. One breakpoint is set exactly at the strike price. The sets of parameters in the computation are:

1. Strike price \(K = {10.0}\)
2. Volatility \( \sigma = {0.4}\)
3. Times until expiration = {1/ 4, 1/ 2}
4. Interest rate \(r = 0.1\)
5. \( x_{\min}=0.0,\, x_{\max}=30.0\)
6. \( nx = 61, \, n=3 \times nx = 183\)

The payoff function is the "vanilla option", \(p(x) = \max(K-x,0)\) .

See Also:

Code, Output

Constructor Summary

Constructors

Constructor and Description
FeynmanKacEx1()

Method Summary

Modifier and Type	Method and Description
static void	main(String[] args)

Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

Constructor Detail

FeynmanKacEx1

public FeynmanKacEx1()

Method Detail

main

public static void main(String[] args)
                 throws Exception

Throws:

Exception