Modeling American Put Options for Oil Producers in the Covid-19 Era

Abstract

In this paper, we conducted an analysis using the Heston model to evaluate American put options. To facilitate our analysis, we discretized the model, leading to the formulation of a linear complementarity problem. To efficiently solve this problem, we employed a fast algorithm. Moreover, we extended the applicability of the Heston model by incorporating a rate dividend into the partial differential equation. Our research underscores the importance of American options as a valuable tool for risk management in the oil industry. To illustrate the practical utility of American options, we presented an example demonstrating their effectiveness in supporting oil-producing companies. Specifically, we showcased how American put options can effectively function in real-world scenarios. Our findings highlight the significant role that American options can play in managing risk within the volatile oil industry.