A Perturbative Approach to Bermudan Options Pricing

18 Pages Posted: 31 Oct 2006  

Roberto Baviera

Polytechnic University of Milan - Department of Mathematics

Lorenzo Giada

Abaxbank

Date Written: November 7, 2006

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.

Keywords: Bermudan options, Callable products, HJM framework

Suggested Citation

Baviera, Roberto and Giada, Lorenzo, A Perturbative Approach to Bermudan Options Pricing (November 7, 2006). Available at SSRN: https://ssrn.com/abstract=941318 or http://dx.doi.org/10.2139/ssrn.941318

Roberto Baviera (Contact Author)

Polytechnic University of Milan - Department of Mathematics ( email )

P.zza L. da Vinci, 32
Milan, 20133
Italy

Lorenzo Giada

Abaxbank ( email )

Corso Monforte,34
Milan, I - 20122
Italy

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