A Simplified Quadrature Approach for Computing Bermudan Option Prices

12 Pages Posted: 7 Dec 2016

Date Written: December 2016

Abstract

We examine a simple quadrature approach to compute the prices of Bermudan options when the value of the corresponding European claim can be computed in closed form, one period before maturity. Using a constant grid of stock prices at early exercise time points, the known value of the European option is used as a smoothing device to enable efficient numerical integ ration with quadrature approaches. Examples with the geometric Brownian motion context and the lognormal jump‐diffusion context are provided.

Suggested Citation

Simonato, Jean-Guy, A Simplified Quadrature Approach for Computing Bermudan Option Prices (December 2016). International Review of Finance, Vol. 16, Issue 4, pp. 647-658, 2016. Available at SSRN: https://ssrn.com/abstract=2881019 or http://dx.doi.org/10.1111/irfi.12086

Jean-Guy Simonato (Contact Author)

HEC Montréal ( email )

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