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Juggling Snowballs

16 Pages Posted: 6 Aug 2008 Last revised: 17 Sep 2008

Christopher Beveridge

University of Melbourne - Centre for Actuarial Studies

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies

Date Written: August 6, 2008

Abstract

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

Beveridge, Christopher and Joshi, Mark S., Juggling Snowballs (August 6, 2008). Available at SSRN: https://ssrn.com/abstract=1207482 or http://dx.doi.org/10.2139/ssrn.1207482

Christopher Beveridge

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

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