Pricing American interest rate option on zero-coupon bond numerically

摘要

In this paper, an American put option on zero-coupon bond is priced numerically by finite volume method (FVM) under a single factor model of the short-term rate. In term of the price of zero-coupon bond, an integral representation of the early exercise rate is derived, which can both locate the exercise rate and be viewed as an error indicator. In our numerical results, the prices of zero-coupon bond and American put option are given and the optimal early interest rate is also provided.