This paper describes an American Monte Carlo approach for obtaining fast and accurate exercise policies for pricing of callable LIBOR Exotics (e.g., Bermudan swaptions) in the LIBOR market model using the Stochastic Grid Bundling Method (SGBM). SGBM is a bundling and regression based Monte Carlo method where the continuation value is projected onto a space where the distribution is known. We also demonstrate an algorithm to obtain accurate and tight lower–upper bound values without the need for nested Monte Carlo simulations.
Additional Metadata
Keywords Applied mathematical finance, Bermudan swaptions, computational finance, derivative pricing models, interest rate modelling, LIBOR market model
THEME Null option (theme 11)
Publisher World Scientific Publishing Company
Stakeholder ING, Amsterdam, The Netherlands
Persistent URL dx.doi.org/10.1142/S2424786316500055
Journal International Journal of Financial Engineering
Citation
Karlsson, P.K, Jain, S, & Oosterlee, C.W. (2016). Fast and accurate exercise policies for Bermudan swaptions in the LIBOR market model. International Journal of Financial Engineering, 3(1). doi:10.1142/S2424786316500055