Bermudan Option Pricing with Monte-Carlo Methods
20 Pages Posted: 23 Dec 2009
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: Suggested Citation
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