The pricing of Bermudan-style options on correlated assets

Sandra Peterson () and Richard Stapleton ()

Review of Derivatives Research, 2002, vol. 5, issue 2, 127-151

Abstract: In this paper, we present a methodology for approximating a correlated multivariate-lognormal process with a recombining or “simple” multivariate-binomial process. The method represents an extension and implementation of previous work by Nelson and Ramaswamy (1990) and Ho, Stapleton and Subrahmanyam (1995) on diffusion approximation. The general method is illustrated by pricing a Bermudan-style put option on the minimum of three asset prices, and by pricing Bermudan-style options on bonds, where the value of the bond at a point in time depends upon the interest rate in two currencies and the foreign exchange rate. This type of structure, known as the “Power Reverse Dual” is a popular product in the case of Japanese Yen-US Dollar currencies. Copyright Kluwer Academic Publishers 2002

Keywords: Binomial approximation; correlated assets; options (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (2)

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DOI: 10.1023/A:1016580628872

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