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Adaptive Simulation Algorithms for Pricing American and Bermudian Options by Local Analysis of Financial Market

  • Denis Belomestny
  • Grigori Milstein

Here we develop an approach for efficient pricing discrete-time American and Bermudan options which employs the fact that such options are equivalent to the European ones with a consumption, combined with analysis of the market model over a small number of steps ahead. This approach allows constructing both upper and low bounds for the true price by Monte Carlo simulations. An adaptive choice of local low bounds and use of the kernel interpolation technique enhance efficiency of the whole procedure, which is supported by numerical experiments.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2006-038.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-038.

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Length: 16 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-038
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