SIMULATING BERMUDAN INTEREST RATE DERIVATIVES

Peter Carr and Guang Yang
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Guang Yang: NumeriX LLC, 546 Fifth Avenue, 17th Floor, New York, NY 11553, USA

Chapter 11 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar(Volume II), 2001, pp 295-316 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe use simulation to develop a Markov chain approximation for the value of caplets and Bermudan interest rate derivatives in the Market Model developed by Brace, Gatarek, and Musiela (1995) and Jamshidian (1996a, b). One and two factor versions of the Market Model were numerically studied. Our approach yields numerical values for caplets which are in close agreement with analytical solutions. We also provide numerical solutions for several Bermudan swaptions.

Date: 2001
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