Bermudan swaptions in Hull-White one-factor model: analytical and numerical approaches

Marc Henrard ()

Finance from EconWPA

Abstract: A popular way to value (Bermudan) swaption in a Hull-White or extended Vasicek model is to use a tree approach. In this note we show that a more direct approach through iterated numerical integration is also possible. A brute force numerical integration would lead to a complexity exponential in the number of exercise dates in the base of the number of points ($p^N$). By carefully choosing the integration points and their order we can reduce it to a complexity $pN^2$ versus a quadratic $(pN)^2$ in the tree. We also provide a semi-explicit formula that leads to a faster converging implementation.

Keywords: Bermudan option; swaption; Hull-White model; one-factor model; numerical integration. (search for similar items in EconPapers)
JEL-codes: G13 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-fin and nep-mac
Date: 2005-05-30
Note: Type of Document - pdf; pages: 9. Draft version, comments welcome. Math Subject Classification MSC2000: 91B28, 91B24, 91B70
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0505023

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