16 Pages Posted: 6 Aug 2008 Last revised: 17 Sep 2008
Date Written: August 6, 2008
The pricing of snowball notes in the full-factor LIBOR market model is considered. The primary aspect of the problem considered is the early exercise feature, and it is shown how to characterize a class of sub-optimal points of exercise. By combining this characterization with least-squares regression on a suitable set of basis functions and using an extra trigger enhancement, it is shown that very tight lower bounds can be obtained in cases where previous methods required the use of sub-Monte Carlo simulations.
Keywords: early exercise, snowball, LIBOR market model, Monte Carlo simulation, American option
JEL Classification: G13
Suggested Citation: Suggested Citation
By Mark Joshi
By Claudio Moni