A Front-Fixing Finite Element Method for the Valuation of American Put Options on Zero-Coupon Bonds

Abstract

A front-fixing finite element method is developed for the valuation of American put options on zero-coupon bonds under a class of one-factor models of short interest rates. Numerical results are presented to examine our method and to compare it with the usual finite element method. A conjecture concerning the behavior of the early exercise boundary near the option expiration date is proposed according to the numerical results.