Quantization-based Bermudan option pricing in the FX world

Jean-Michel Fayolle, Vincent Lemaire (), Thibaut Montes and Gilles Pagès ()
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Jean-Michel Fayolle: ICA - The Independent Calculation Agent
Vincent Lemaire: LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique
Thibaut Montes: LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique, ICA - The Independent Calculation Agent
Gilles Pagès: LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - UPD7 - Université Paris Diderot - Paris 7 - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper proposes two numerical solution based on Product Optimal Quan-tization for the pricing of Foreign Echange (FX) linked long term Bermudan options e.g. Bermudan Power Reverse Dual Currency options, where we take into account stochastic domestic and foreign interest rates on top of stochastic FX rate, hence we consider a 3-factor model. For these two numerical methods, we give an estimation of the $L^2$-error induced by such approximations and we illustrate them with market-based examples that highlight the speed of such methods.

Keywords: Numerical method; Bermudan Options; Foreign Exchange rates; Power Reverse Dual Currency; Product Optimal Quantization (search for similar items in EconPapers)
Date: 2020-05-01
Note: View the original document on HAL open archive server: https://hal.science/hal-02361667v2
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