  We present a multigrid iterative algorithm for solving a system of coupled
free boundary problems for pricing American put options with regime-switching.
The algorithm is based on our recently developed compact finite difference
scheme coupled with Hermite interpolation for solving the coupled partial
differential equations consisting of the asset option and the delta, gamma, and
speed sensitivities. In the algorithm, we first use the Gauss-Seidel method as
a smoother and then implement a multigrid strategy based on modified cycle
(M-cycle) for solving our discretized equations. Hermite interpolation with
Newton interpolatory divided difference (as the basis) is used in estimating
the coupled asset, delta, gamma, and speed options in the set of equations. A
numerical experiment is performed with the two- and four- regime examples and
compared with other existing methods to validate the optimal strategy. Results
show that this algorithm provides a fast and efficient tool for pricing
American put options with regime-switching.
