Bermudan Option Pricing with Monte-Carlo Methods

20 Pages Posted: 23 Dec 2009

See all articles by Raphael Douady

Raphael Douady

CES Univ. Paris 1; Riskdata; Stony Brook university

Date Written: January 30, 2002

Abstract

We explain, compare and improve two algorithms to compute American or Bermudan options by Monte-Carlo. The first one is based on threshold optimisation in the exercise strategy (Andersen 1999). The notion of ''fuzzy threshold'' is introduced to ease optimisation. The second one uses a linear regression to get an estimate of the option price at intermediary dates and determine the exercise strategy (Carriere 1997, Longstaff-Schwartz 1999). We thoroughly study the convergence of these two approaches, including a mixture of both.

Keywords: Term structure models, Bermudan options, Monte-Carlo pricing

JEL Classification: G13

Suggested Citation

Douady, Raphael, Bermudan Option Pricing with Monte-Carlo Methods (January 30, 2002). Available at SSRN: https://ssrn.com/abstract=1526765 or http://dx.doi.org/10.2139/ssrn.1526765

Raphael Douady (Contact Author)

CES Univ. Paris 1 ( email )

106 bv de l'Hôpital
Paris, 75013
France

Riskdata ( email )

6, rue de l'Amiral Coligny
Paris, 75001
France

HOME PAGE: http://www.riskdata.com

Stony Brook university ( email )

Stony Brook, NY NY 10017
United States
9174769417 (Phone)
10017-2146 (Fax)

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