School Seminars and Colloquia

Practical Policy Iteration: Generic Methods for Obtaining Rapid and Tight 
Bounds for Bermudan Exotic Derivatives Using Monte Carlo Simulation

Stochastic Processes and Financial Mathematics

by Christopher Beveridge

Institution: University of Melbourne
Date: Thu 2nd April 2009
Time: 3:15 PM
Location: Russell Love Theatre, Richard Berry Building

Abstract: We introduce a set of improvements which allow the calculation of very tight lower bounds for Bermudan derivatives using Monte Carlo simulation. These lower bounds can be computed quickly, and with minimal hand-crafting. Our focus is on accelerating policy iteration to the point where it can be used in similar computation times to the basic least-squares approach, but in doing so introduce a number of improvements which can be applied to both the least-squares approach and the calculation of upper bounds using the Andersen-Broadie method. The 
enhancements to the least-squares method improve both accuracy and efficiency. Results are provided for the displaced-diffusion LIBOR market model, demonstrating that our practical policy iteration algorithm can be used to obtain tight lower bounds for cancellable CMS steepener, snowball and vanilla swaps in similar times to the basic least-squares method.

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