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Convergence rate of free boundary of numerical scheme for American option

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  • Based on the optimal estimate of convergence rate $O(\Delta x)$ of the value function of an explicit finite difference scheme for the American put option problem in [6], an $O(\sqrt{\Delta x})$ rate of convergence of the free boundary resulting from a general compatible numerical scheme to the true free boundary is proven. A new criterion for the compatibility of a generic numerical scheme to the PDE problem is presented. A numerical example is also included.
    Mathematics Subject Classification: 91G20, 91G60, 91G80.


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