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Bermudan Option Pricing With Monte-Carlo Methods

In: Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar(Volume III)

Author

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  • RAPHAËL DOUADY

    (C.N.R.S. and Ecole Normale Supérieure, C.M.L.A., 61 av. du Pdt Wilson, 94235 Cachan Cedex, France)

Abstract

We 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.

Suggested Citation

  • Raphaël Douady, 2002. "Bermudan Option Pricing With Monte-Carlo Methods," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar(Volume III), chapter 14, pages 314-328, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812778451_0014
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    Cited by:

    1. Schmeiser, H. & Wagner, J., 2011. "A joint valuation of premium payment and surrender options in participating life insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 580-596.
    2. Alexander Kling & Jochen Russ & Hato Schmeiser, 2006. "Analysis of embedded options in individual pension schemes in Germany," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 31(1), pages 43-60, July.

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    Keywords

    Quantitative Analysis; Financial Markets;

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