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A Matched Asymptotic Expansions Approach to Continuity Corrections for Discretely Sampled Options. Part 2: Bermudan Options

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  • Sam Howison
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    Abstract

    The paper discusses the 'continuity correction' that should be applied to connect the prices of discretely sampled American put options (i.e. Bermudan options) and their continuously-sampled equivalents. Using a matched asymptotic expansions approach the correction is computed and related to that discussed by Broadie, Glasserman & Kou (1997) (Mathematical Finance, 7, p.325 for barrier options. In the Bermudan case, the continuity correction is an order of magnitude smaller than in the corresponding barrier problem. It is also shown that the optimal exercise boundary in the discrete case is slightly higher than in the continuously sampled case.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 14 (2007)
    Issue (Month): 1 ()
    Pages: 91-104

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    Handle: RePEc:taf:apmtfi:v:14:y:2007:i:1:p:91-104

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