Bermudan Option Pricing with Monte-Carlo Methods
Raphael Douady2002, WORLD SCIENTIFIC eBooks
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Abstract
We explain, compare and improve two algorithms to compute American or Bermudan options by Monte-Carlo. The …rst 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, Longsta¤-Schwartz 1999). We thoroughly study the convergence of these two approaches, including a mixture of both.
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