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A Simplified Quadrature Approach for Computing Bermudan Option Prices
Author(s) -
Simonato JeanGuy
Publication year - 2016
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12086
Subject(s) - quadrature (astronomy) , smoothing , geometric brownian motion , grid , context (archaeology) , jump , mathematical optimization , mathematics , computer science , econometrics , diffusion process , geometry , statistics , engineering , paleontology , knowledge management , physics , innovation diffusion , quantum mechanics , electrical engineering , biology
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.