Linear Programming Approach to American Option Pricing

Zhen Liu
Assistant Professor, Daniel L. Goodwin College of Business, Benedictine University
Friday, September 29, 2017 -
5:30pm to 6:30pm
Vincent Hall 16

We solve the variational inequality (VI) from American option pricing problem by linear programming (LP) approach. We approximate its solution by a combination of basis functions. The objective is to minimize the absolute error of the solution and the max operator in VI is converted into linear constraints of LP. We discuss its convergence, and compare our results with Longstaff-Schwartz least-square approach and numerical partial differential equation (PDE) approach.