Skip to main content
    • Aa
    • Aa

Primal-Dual Active Set Method for American Lookback Put Option Pricing

  • Haiming Song (a1), Xiaoshen Wang (a2), Kai Zhang (a1) and Qi Zhang (a3)

The pricing model for American lookback options can be characterised as a two-dimensional free boundary problem. The main challenge in this problem is the free boundary, which is also the main concern for financial investors. We use a standard technique to reduce the pricing model to a one-dimensional linear complementarity problem on a bounded domain and obtain a corresponding variational inequality. The inequality is discretised by finite differences and finite elements in the temporal and spatial directions, respectively. By enforcing inequality constraints related to the options using Lagrange multipliers, the discretised variational inequality is reformulated as a set of semi-smooth equations, which are solved by a primal-dual active set method. One of the major advantages of our algorithm is that we can obtain the option values and the free boundary simultaneously, and numerical simulations show that our approach is as efficient as some other methods.

Corresponding author
*Corresponding author. Email address: (K. Zhang)
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

East Asian Journal on Applied Mathematics
  • ISSN: 2079-7362
  • EISSN: 2079-7370
  • URL: /core/journals/east-asian-journal-on-applied-mathematics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Full text views

Total number of HTML views: 1
Total number of PDF views: 3 *
Loading metrics...

Abstract views

Total abstract views: 22 *
Loading metrics...

* Views captured on Cambridge Core between 7th September 2017 - 23rd September 2017. This data will be updated every 24 hours.