Effective Sub-Simulation-Free Upper Bounds for the Monte Carlo Pricing of Callable Derivatives and Various Improvements to Existing Methodologies

47 Pages Posted: 29 Jun 2012 Last revised: 14 May 2013

See all articles by Mark S. Joshi

Mark S. Joshi

University of Melbourne - Centre for Actuarial Studies (deceased)

Robert Tang

University of Melbourne - Centre for Actuarial Studies

Date Written: June 29, 2012

Abstract

We present a new non-nested approach to computing additive upper bounds for callable derivatives using Monte Carlo simulation. It relies on the regression of Greeks computed using adjoint methods. We also show that it is is possible to early terminate paths once points of optimal exercise have been reached. A natural control variate for the multiplicative upper bound is introduced which renders it competitive to the additive one. In addition, a new bi-iterative family of upper bounds is introduced which take a stopping time, an upper bound, and a martingale as inputs.

Suggested Citation

Joshi, Mark and Tang, Robert, Effective Sub-Simulation-Free Upper Bounds for the Monte Carlo Pricing of Callable Derivatives and Various Improvements to Existing Methodologies (June 29, 2012). Available at SSRN: https://ssrn.com/abstract=2095988 or http://dx.doi.org/10.2139/ssrn.2095988

Mark Joshi (Contact Author)

University of Melbourne - Centre for Actuarial Studies (deceased) ( email )

Melbourne, 3010
Australia

Robert Tang

University of Melbourne - Centre for Actuarial Studies ( email )

Melbourne, 3010
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
389
rank
73,845
Abstract Views
2,155
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information