Laplace Transform Method for Pricing American CEV Strangles Option with Two Free Boundaries

<table class="algorithm-group"><tr><td><table class="algorithm" id="alg2"><tr><td colspan="2"><b>Step </b><span style="margin-left:0em"></span><b>1</b><b>.</b><span style="margin-left:0.55555555555555558em"></span>Use Algorithm <a href="../alg1/">1</a> to compute <svg height="14.8812pt" id="M148" style="vertical-align:-6.2453pt" version="1.1" viewbox="-0.0498162 -8.6359 12.2098 14.8812" width="12.2098pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M449 634C442 637 425 643 405 650C376 660 341 666 307 666C181 666 98 590 98 485C98 400 170 343 215 310L246 288C307 243 343 204 343 147C343 67 291 18 219 18C104 18 61 124 51 202L23 199C28 124 27 71 27 47C47 22 122 -16 204 -16C324 -16 428 60 428 174C428 256 379 309 307 360L276 382C223 419 179 455 179 516C179 576 221 632 293 632C379 632 410 564 418 487L448 490C446 536 446 592 449 634Z" id="g113-84"></path></g><rect height="0.65243" width="6.159" x="0" y="2.11387"></rect><g transform="matrix(.0091,0,0,-0.0091,6.159,3.903)"><path d="M573 302C573 402 527 451 414 451C386 451 343 446 313 437L330 513L320 522C295 508 261 484 243 463L230 415C194 400 159 383 126 359L131 330C159 344 187 357 222 368L109 -147C96 -204 80 -214 18 -223L13 -255L256 -244L259 -212L236 -210C184 -205 180 -195 191 -141L219 -1C240 -10 268 -12 284 -12C352 4 431 48 484 104C543 166 573 240 573 302ZM481 290C481 165 381 37 305 37C280 37 249 56 235 71L302 395C328 399 353 402 372 402C427 402 481 378 481 290Z" id="g50-113"></path></g></svg> and <span class="nowrap"><svg height="15.1892pt" id="M149" style="vertical-align:-3.291101pt" version="1.1" viewbox="-0.0498162 -11.8981 10.5109 15.1892" width="10.5109pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><rect height="0.65243" width="6.159" x="0" y="-11.1958"></rect><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M449 634C442 637 425 643 405 650C376 660 341 666 307 666C181 666 98 590 98 485C98 400 170 343 215 310L246 288C307 243 343 204 343 147C343 67 291 18 219 18C104 18 61 124 51 202L23 199C28 124 27 71 27 47C47 22 122 -16 204 -16C324 -16 428 60 428 174C428 256 379 309 307 360L276 382C223 419 179 455 179 516C179 576 221 632 293 632C379 632 410 564 418 487L448 490C446 536 446 592 449 634Z" id="g113-84"></path></g><g transform="matrix(.0091,0,0,-0.0091,6.159,3.132)"><path d="M387 400C387 425 348 451 303 451C247 451 176 414 132 376C69 322 24 228 24 148C24 43 74 -12 147 -12C211 -12 301 33 363 103L346 128C319 99 249 51 193 51C148 51 112 84 112 165C112 230 130 287 154 330C170 359 199 400 243 400C277 400 304 383 326 354C333 345 343 343 354 348C378 360 387 382 387 400Z" id="g50-100"></path></g></svg>.</span></td></tr><tr><td colspan="2"><b>Step </b><span style="margin-left:0em"></span><b>2</b><b>.</b><span style="margin-left:0.55555555555555558em"></span>Compute <svg height="14.7625pt" id="M150" style="vertical-align:-5.47417pt" version="1.1" viewbox="-0.0498162 -9.28833 26.6939 14.7625" width="26.6939pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M471 456L444 459C426 433 414 430 388 430C324 430 270 434 216 434C103 434 51 374 23 338L43 317C96 366 146 380 221 375L154 109C149 86 147 68 147 52C147 4 168 -12 197 -12C240 -12 291 25 334 71L320 96C295 75 268 58 252 58C238 58 227 79 238 138C251 211 272 296 292 372C310 372 332 368 350 368C391 368 421 369 434 371C444 388 455 413 471 456Z" id="g113-241"></path></g><g transform="matrix(.0091,0,0,-0.0091,5.434,3.132)"><path d="M573 302C573 402 527 451 414 451C386 451 343 446 313 437L330 513L320 522C295 508 261 484 243 463L230 415C194 400 159 383 126 359L131 330C159 344 187 357 222 368L109 -147C96 -204 80 -214 18 -223L13 -255L256 -244L259 -212L236 -210C184 -205 180 -195 191 -141L219 -1C240 -10 268 -12 284 -12C352 4 431 48 484 104C543 166 573 240 573 302ZM481 290C481 165 381 37 305 37C280 37 249 56 235 71L302 395C328 399 353 402 372 402C427 402 481 378 481 290Z" id="g50-113"></path></g><g transform="matrix(.013,0,0,-0.013,11.385,0)"><path d="M300 -147C201 -63 143 98 143 270S200 602 300 686L282 710C136 610 70 450 70 271V270C70 89 136 -72 282 -170L300 -147Z" id="g113-41"></path></g><g transform="matrix(.013,0,0,-0.013,15.883,0)"><path d="M449 634C442 637 425 643 405 650C376 660 341 666 307 666C181 666 98 590 98 485C98 400 170 343 215 310L246 288C307 243 343 204 343 147C343 67 291 18 219 18C104 18 61 124 51 202L23 199C28 124 27 71 27 47C47 22 122 -16 204 -16C324 -16 428 60 428 174C428 256 379 309 307 360L276 382C223 419 179 455 179 516C179 576 221 632 293 632C379 632 410 564 418 487L448 490C446 536 446 592 449 634Z" id="g113-84"></path></g><g transform="matrix(.013,0,0,-0.013,22.019,0)"><path d="M275 270C275 450 212 609 64 710L45 686C145 604 203 442 203 270S147 -63 45 -147L64 -170C213 -68 275 89 275 270Z" id="g113-42"></path></g></svg> and <svg height="12.5794pt" id="M151" style="vertical-align:-3.29107pt" version="1.1" viewbox="-0.0498162 -9.28833 24.995 12.5794" width="24.995pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M471 456L444 459C426 433 414 430 388 430C324 430 270 434 216 434C103 434 51 374 23 338L43 317C96 366 146 380 221 375L154 109C149 86 147 68 147 52C147 4 168 -12 197 -12C240 -12 291 25 334 71L320 96C295 75 268 58 252 58C238 58 227 79 238 138C251 211 272 296 292 372C310 372 332 368 350 368C391 368 421 369 434 371C444 388 455 413 471 456Z" id="g113-241"></path></g><g transform="matrix(.0091,0,0,-0.0091,5.434,3.132)"><path d="M387 400C387 425 348 451 303 451C247 451 176 414 132 376C69 322 24 228 24 148C24 43 74 -12 147 -12C211 -12 301 33 363 103L346 128C319 99 249 51 193 51C148 51 112 84 112 165C112 230 130 287 154 330C170 359 199 400 243 400C277 400 304 383 326 354C333 345 343 343 354 348C378 360 387 382 387 400Z" id="g50-100"></path></g><g transform="matrix(.013,0,0,-0.013,9.686,0)"><path d="M300 -147C201 -63 143 98 143 270S200 602 300 686L282 710C136 610 70 450 70 271V270C70 89 136 -72 282 -170L300 -147Z" id="g113-41"></path></g><g transform="matrix(.013,0,0,-0.013,14.184,0)"><path d="M449 634C442 637 425 643 405 650C376 660 341 666 307 666C181 666 98 590 98 485C98 400 170 343 215 310L246 288C307 243 343 204 343 147C343 67 291 18 219 18C104 18 61 124 51 202L23 199C28 124 27 71 27 47C47 22 122 -16 204 -16C324 -16 428 60 428 174C428 256 379 309 307 360L276 382C223 419 179 455 179 516C179 576 221 632 293 632C379 632 410 564 418 487L448 490C446 536 446 592 449 634Z" id="g113-84"></path></g><g transform="matrix(.013,0,0,-0.013,20.32,0)"><path d="M275 270C275 450 212 609 64 710L45 686C145 604 203 442 203 270S147 -63 45 -147L64 -170C213 -68 275 89 275 270Z" id="g113-42"></path></g></svg> by optimizing (<a href="https://static.hindawi.com/articles/ddns/volume-2018/5908646/figures/#EEq32">34</a>).</td></tr><tr><td colspan="2"><b>Step </b><span style="margin-left:0em"></span><b>3</b><b>.</b><span style="margin-left:0.55555555555555558em"></span>Solve the linear system (<a href="https://static.hindawi.com/articles/ddns/volume-2018/5908646/figures/#EEq21">23</a>) to get <span class="nowrap"><svg height="18.6445pt" id="M152" style="vertical-align:-2.268101pt" version="1.1" viewbox="-0.0498162 -16.3764 27.1049 18.6445" width="27.1049pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.0091,0,0,-0.0091,.478,-8.899)"><path d="M598 0L339 555H273L14 0H80L305 483H307L532 0H598Z" id="g54-63"></path></g><g transform="matrix(.013,0,0,-0.013,0,-.522)"><path d="M483 442H303V410C358 401 362 388 351 355C329 286 296 195 278 149C262 190 226 288 200 358C188 393 193 400 239 410V442H-8V410C40 400 53 388 71 344C120 229 165 113 215 -11H254C315 141 364 261 400 342C421 389 433 400 483 410V442Z" id="g185-60"></path></g><g transform="matrix(.0091,0,0,-0.0091,6.303,-12.161)"><path d="M504 89L488 119C453 85 428 69 416 69C408 69 405 75 412 102L462 304C492 438 460 451 436 451S388 441 356 423C311 397 229 336 170 256H168L189 340C208 418 200 451 177 451C144 451 82 413 24 352L40 322C65 345 98 369 108 369C114 369 119 363 112 335L28 -3L36 -12C54 -3 83 4 112 10C125 73 138 122 153 174C205 258 328 382 376 382C395 382 399 369 384 305L330 93C312 25 323 -12 351 -12C378 -12 439 21 504 89Z" id="g50-111"></path></g><g transform="matrix(.013,0,0,-0.013,11.477,0)"><path d="M300 -147C201 -63 143 98 143 270S200 602 300 686L282 710C136 610 70 450 70 271V270C70 89 136 -72 282 -170L300 -147Z" id="g113-41"></path></g><g transform="matrix(.013,0,0,-0.013,15.975,0)"><path d="M475 445L452 468C423 436 401 426 385 426S352 427 305 436C268 443 216 448 185 448C156 448 128 425 102 382C89 360 77 338 64 304L89 291C117 340 143 380 190 380C214 380 268 376 295 373C320 370 344 371 362 374L70 101C32 65 23 36 23 18C23 5 27 -3 31 -8C36 -8 39 -6 42 -1C52 15 67 31 80 40S110 49 143 33C195 8 257 -20 290 -20C339 -20 382 11 439 129L416 148C366 74 334 55 305 55C278 55 236 68 203 81C169 94 141 100 122 96C205 170 348 308 411 376L475 445Z" id="g113-123"></path></g><g transform="matrix(.013,0,0,-0.013,22.45,0)"><path d="M275 270C275 450 212 609 64 710L45 686C145 604 203 442 203 270S147 -63 45 -147L64 -170C213 -68 275 89 275 270Z" id="g113-42"></path></g></svg>.</span></td></tr><tr><td colspan="2"><b>Step </b><span style="margin-left:0em"></span><b>4</b><b>.</b><span style="margin-left:0.55555555555555558em"></span>Apply Laplace inversion GSF or HCIM to restore American Strangles option</td></tr><tr><td colspan="2">value <span class="nowrap"><svg height="12.2245pt" id="M153" style="vertical-align:-2.268109pt" version="1.1" viewbox="-0.0498162 -9.95639 26.9092 12.2245" width="26.9092pt" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink"><g transform="matrix(.013,0,0,-0.013,0,0)"><path d="M483 442H303V410C358 401 362 388 351 355C329 286 296 195 278 149C262 190 226 288 200 358C188 393 193 400 239 410V442H-8V410C40 400 53 388 71 344C120 229 165 113 215 -11H254C315 141 364 261 400 342C421 389 433 400 483 410V442Z" id="g185-60"></path></g><g transform="matrix(.0091,0,0,-0.0091,6.28,-5.741)"><path d="M504 89L488 119C453 85 428 69 416 69C408 69 405 75 412 102L462 304C492 438 460 451 436 451S388 441 356 423C311 397 229 336 170 256H168L189 340C208 418 200 451 177 451C144 451 82 413 24 352L40 322C65 345 98 369 108 369C114 369 119 363 112 335L28 -3L36 -12C54 -3 83 4 112 10C125 73 138 122 153 174C205 258 328 382 376 382C395 382 399 369 384 305L330 93C312 25 323 -12 351 -12C378 -12 439 21 504 89Z" id="g50-111"></path></g><g transform="matrix(.013,0,0,-0.013,11.455,0)"><path d="M300 -147C201 -63 143 98 143 270S200 602 300 686L282 710C136 610 70 450 70 271V270C70 89 136 -72 282 -170L300 -147Z" id="g113-41"></path></g><g transform="matrix(.013,0,0,-0.013,15.953,0)"><path d="M471 456L444 459C426 433 414 430 388 430C324 430 270 434 216 434C103 434 51 374 23 338L43 317C96 366 146 380 221 375L154 109C149 86 147 68 147 52C147 4 168 -12 197 -12C240 -12 291 25 334 71L320 96C295 75 268 58 252 58C238 58 227 79 238 138C251 211 272 296 292 372C310 372 332 368 350 368C391 368 421 369 434 371C444 388 455 413 471 456Z" id="g113-241"></path></g><g transform="matrix(.013,0,0,-0.013,22.235,0)"><path d="M275 270C275 450 212 609 64 710L45 686C145 604 203 442 203 270S147 -63 45 -147L64 -170C213 -68 275 89 275 270Z" id="g113-42"></path></g></svg>.</span></td></tr></table></td></tr></table>

<div>NLTM algorithm for pricing American Strangles.</div>

Discrete Dynamics in Nature and Society

alg2

Algorithm 2

Algorithm 2: Laplace Transform Method for Pricing American CEV Strangles Option with Two Free Boundaries 