A perturbative approach to Bermudan options pricing with applications |
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Authors: | Roberto Baviera Lorenzo Giada |
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Affiliation: | 1. Politecnico di Milano , piazza Leonardo da Vinci 32, I-20133 Milan , Italy;2. RondPoint , via Settembrini 26, I-20124 Milan , Italy roberto.baviera@rondpoint.it;4. Banco Popolare , via Roncaglia 12, I-20146 Milan , Italy |
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Abstract: | In this paper we address the problem of the valuation of Bermudan option derivatives in the framework of multi-factor interest rate models. We propose a solution in which the exercise decision entails a properly defined series expansion. The method allows for the fast computation of both a lower and an upper bound for the option price, and a tight control of its accuracy, for a generic Markovian interest rate model. In particular, we show detailed computations in the case of the Bond Market Model. As examples we consider the case of a zero coupon Bermudan option and a coupon bearing Bermudan option; in order to demonstrate the wide applicability of the proposed methodology we also consider the case of a last generation payoff, a Bermudan option on a CMS spread bond. |
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Keywords: | Options pricing Options applications Multi-factor models Bond yields |
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