Pricing a Bermudan Swaption with a Short Rate Lattice Method

Yasuhiro Tamba ()
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Yasuhiro Tamba: Graduate School of Economics, Osaka University

No 05-03, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper presents the tree construction approach to pricing a Bermudan swaption. The Bermudan swaption is an option, which at each date in a schedule of exercise dates gives the holder the right to enter an interest swap, provided that this right has not been exercised at any previous time in the schedule. Assuming a common diffusion short rate dynamics, the Hull-White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds and European swaptions.

Keywords: Bermudan swaption; swap rate; risk neutral evaluation; dynamic programming; Hull-White model; calibration. (search for similar items in EconPapers)
JEL-codes: G13 G15 G21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005-03
New Economics Papers: this item is included in nep-fin
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