October 12th, 2011, 2:51 pm
Apologies for the stupid question, it's been a while and I'm finding the literature confusing. I've commonly seen implemented, finite difference methods where the american option price is set to be the maximum of the solved value at a particular node, and the immediate exercise value at that point. Alternatively, I've seen a fair number of SOR implementations with an iterative solution.Is the former correct or merely a convenient "approximation"? Is there a definitive paper on this? It seems like there's an awful lot proved in terms of getting to the method or supporting methods but difficult to tell which the relevant results are in terms of implementing the method.