Pricing problems of perpetual Bermudan options

Yoshifumi Muroi and Takashi Yamada
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Takashi Yamada: Tokyo Institute of Technology

No 345, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: The pricing problem of options with an early exercise feature, such as American options, is one of the important topics in mathematical finance. The pricing formulas for American options, however, have not been found in general and the numerical methods are required to derive the price of these options, besides some exceptions, such as perpetual American options. Although the closed form pricing formula for perpetual American options in the Black and Scholes economy is known explicitly, it seems that the pricing formula for perpetual Bermudan options is not known. The value function of perpetual Bermudan options is characterized with the partial differential equation and this is solved numerically in this article

Keywords: perpetual Bermudan options; optimal stopping problems; linear complementarity problem; PSOR algorithm; linear programming methods; interior point methods (search for similar items in EconPapers)
JEL-codes: C61 G12 G13 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-fin and nep-fmk
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