In a market where a stochastic interest rate component characterizes asset dynamics, we propose a flexible lattice framework to evaluate and manage options on equities paying discrete dividends and variable annuities presenting some provisions, like a guaranteed minimum withdrawal benefit. The framework is flexible in that it allows to combine financial and demographic risk, to embed in the contract early exercise features, and to choose the dynamics for interest rates and traded assets. A computational problem arises when each dividend (when valuing an option) or withdrawal (when valuing a variable annuity) is paid, because the lattice lacks its recombining structure. The proposed model overcomes this problem associating with each node of the lattice a set of representative values of the underlying asset (when valuing an option) or of the personal subaccount (when valuing a variable annuity) chosen among all the possible ones realized at that node. Extensive numerical experiments confirm the model accuracy and efficiency.

In the present work, we introduce a new numerical method based on a strong version of the mean-value theorem for integrals to solve quadratic Volterra integral equations and Fredholm integral equations of the second kind, for which there are theoretical monotonic non-negative solutions. By means of an equality theorem, the integral that appears in the aforementioned equations is transformed into one that enables a more accurate numerical solution with fewer calculations than other previously described methods. Convergence analysis is given.

We consider the linear, second-order elliptic, Schrödinger-type differential operator L:=−12∇2+r22. Because of its rotational invariance, that is it does not change under SO(3) transformations, the eigenvalue problem −12∇2+r22f(x,y,z)=λf(x,y,z) can be studied more conveniently in spherical polar coordinates. It is already known that the eigenfunctions of the problem depend on three parameters. The so-called accidental degeneracy of L occurs when the eigenvalues of the problem depend on one of such parameters only. We exploited ladder operators to reformulate accidental degeneracy, so as to provide a new way to describe degeneracy in elliptic PDE problems.

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This paper deals with a new numerical method for the approximation of the early exercise boundary in the American option pricing problem. In more detail, using the mean-value theorem for integrals, we provide a flexible algorithm that allows for reaching a more accurate numerical solution with fewer calculations rather than other previously described methods.