School Seminars and Colloquia

Efficient and generic methods for obtaining tight bounds for Bermudan exotic derivatives using Monte Carlo simulation

Stochastic Processes and Financial Mathematics

by Chris Beveridge


Institution:
Date: Mon 1st March 2010
Time: 3:15 PM
Location: Alice Hoy, room 325

Abstract: We introduce a set of improvements that 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 range accrual, CMS steepener, snowball and vanilla swaps in similar times to the basic least-squares method.

To handle cancellable range accrual swaps efficiently, we introduce a number of new improvements to the simulation of range accrual coupons in? the displaced-diffusion LIBOR market model.

For More Information: For further details, please contact Prof Daniel Dufresne at dufresne@unimelb.edu.au