Simple Computational Methods for Pricing a Down and Out Basket Bermudan Put

Abstract

A Down and Out Basket Bermudan Put is a derivative instrument which pays out the difference between a strike level and the value of a basket of underlying stocks. The option may be exercised at the discretion of the holder at weekly intervals; exercise is automatic if the basket reaches a predetermined level. We describe an accelerated pricing method and its associated accelerated simulation pricing engine. We find that the engine results are highly accurate and relatively rapid. This along with the system's inherent flexibility allows for the realtime pricing of the Option. The system therefore meets the needs of even the most demanding practitioners.

Keywords: Down and Out Option, Bermudan Option, Basket Option, Stirke, Basket of Stocks, Weekly Exercise Intervals, Automatic Exercise, Accelerate Pricing Methods, Accelerated Simulation, Accurate Pricing, Real-Time Pricing, Greeks, Delta, Gamma, Vega, Theta, Rho

JEL Classification: C61, G12, G13, G14, G24