Numerical Analysis of American Option Pricing in a Jump-Diffusion Model

Published Online:https://doi.org/10.1287/moor.22.3.668

We discuss pricing formulae for American options in Merton's jump-diffusion model. With the help of variational inequalities, we derive some regularity properties of price functions. Using the finite difference method, a discretization scheme is presented and a convergence theorem for the first order derivatives is proved. Numerical methods and results are also discussed.

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