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

11 Pages Posted: 30 May 2007

See all articles by Guanghua Cao

Guanghua Cao

Morgan Stanley

Nathan Coelen

Morgan Stanley

Andrea Ling

University of California, Berkeley - Haas School of Business

Roderick MacLeod

Rodel Tech Financial; U.C. Berkeley Master of Financial Engineering; MIT - B.S. Management Science / Finance

Date Written: March 31, 2006

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

Suggested Citation

Cao, Guanghua and Coelen, Nathan and Ling, Andrea and MacLeod, Roderick, Simple Computational Methods for Pricing a Down and Out Basket Bermudan Put (March 31, 2006). Available at SSRN: https://ssrn.com/abstract=989627 or http://dx.doi.org/10.2139/ssrn.989627

Guanghua Cao

Morgan Stanley ( email )

1585 Broadway
New York, NY 10019
United States

Nathan Coelen

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

Andrea Ling

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Roderick MacLeod (Contact Author)

Rodel Tech Financial ( email )

London
United Kingdom

HOME PAGE: http://www.rodeltechfin.com

U.C. Berkeley Master of Financial Engineering ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

MIT - B.S. Management Science / Finance ( email )

Cambridge, MA 02136
United States

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