Journal of Computational Finance

Risk.net

TR-BDF2 for fast stable American option pricing

Fabien Le Floc’h

ABSTRACT

The trapezoidal rule with second-order backward difference formula (TR-BDF2) finite-difference scheme is applied to the Black-Scholes-Merton partial differential equation on a nonuniform grid. American option convergence and Greeks stability are studied against popular alternatives, namely Crank-Nicolson and Rannacher time-marching.