BERMUDAN OPTION PRICING WITH MONTE-CARLO METHODS

Raphael Douady ()

Chapter 14 in Quantitative Analysis in Financial Markets:Collected Papers of the New York University Mathematical Finance Seminar(Volume III), 2002, pp 314-328 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe explain, compare and improve two algorithms to compute American or Bermudan options by Monte-Carlo. The first one is based on threshold optimisation in the exercise strategy (Andersen, 1999). The notion of “fuzzy threshold” is introduced to ease optimisation. The second one uses a linear regression to get an estimate of the option price at intermediary dates and determine the exercise strategy (Carriere, 1997; Longstaff–Schwartz, 1999). We thoroughly study the convergence of these two approaches, including a mixture of both.

Keywords: Quantitative Analysis; Financial Markets (search for similar items in EconPapers)
Date: 2002
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