A Semi-Lagrangian Approach for American Asian Options under Jump Diffusion

A semi-Lagrangian method is presented to price continuously observed fixed strike Asian options. At each timestep a set of one-dimensional partial integrodifferential equations (PIDEs) is solved and the solution of each PIDE is updated using semi-Lagrangian timestepping. Crank--Nicolson and second-order backward differencing timestepping schemes are studied. Monotonicity and stability results are derived. With low volatility values, it is observed that the nonsmoothness at the strike in the payoff affects the convergence rate; a subquadratic convergence rate is observed.

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