Pricing a Bermudan Swaption with a Short Rate Lattice Method
This paper presents the tree construction approach to pricing a Bermudan swaption. The Bermudan swaption is an option, which at each date in a schedule of exercise dates gives the holder the right to enter an interest swap, provided that this right has not been exercised at any previous time in the schedule. Assuming a common diffusion short rate dynamics, the Hull-White model, we propose a dynamic programming approach for their risk neutral evaluation. This framework is suited to a calibration from an observed initial yield curve and market price data of discount bonds and European swaptions.
|Date of creation:||Mar 2005|
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- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
- Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
- Broadie, Mark & Glasserman, Paul, 1997. "Pricing American-style securities using simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1323-1352, June.
- Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
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