A robust tree method for pricing American options with CIR stochastic interest rate

TL;DR

This paper introduces a robust lattice method for accurately pricing American options when the interest rate follows a CIR stochastic process, overcoming previous numerical limitations.

Contribution

The paper presents a new stable lattice approach that accurately prices American options with CIR interest rates without parameter restrictions.

Findings

Method achieves high accuracy in pricing American options.

Numerical results confirm the method's reliability and stability.

Applicable across various CIR parameter settings.

Abstract

We propose a robust and stable lattice method which permits to obtain very accurate American option prices in presence of CIR stochastic interest rate without any numerical restriction on its parameters. Numerical results show the reliability and the accuracy of the proposed method.