A Perturbative Approach to Bermudan Options Pricing

Abstract:     
In this letter 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 the fast computation of both a lower and an upper bound of the option price, and a tight control of its accuracy. 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.

Number of Pages in PDF File: 18

Keywords: Bermudan options, Callable products, HJM framework

working papers series