0
$\begingroup$

What is the go-to method for pricing of Bermudan/American options?

I've heard the Longstaff-Schwartz method is really popular. Is it better than the other methods generally speaking? If not, which method is usually considered the best?

$\endgroup$
1
  • 1
    $\begingroup$ This question is too broad. It depends on the type of option, on the underlying asset and on the model. In cases where Monte Carlo (MC) simulation is the preffered method (or the only possible method), the Longstaff-Schwartz (LS) is the only possible choice (for Bermudan-American). For example, for some interest rate options, LMM is the best model you can use and LMM is usually implemented by MC simulation, so LS method would be the choice. Another example is a equity basket option with a "strange" payoff. You are forced to use MC and therefore, LS method will be the only possible choice. $\endgroup$ – user39119 Feb 10 '20 at 10:38
-1
$\begingroup$

Binomial tree is better for american style options. I've already done comparison between LS montecarlo and binomial tree and i found that binomial tree gives more precise results for the same computation time.

For comparison, you know that european call and american call with the same inputs and zero dividend should give the same price. So, I've defined as a reference european call black & scholes prices and compared it with american calls prices using Binomial tree and LS montecarlo. Finally, i found that using binomial tree, the results were closer to the black scholes ones.

You can test it using my online pricing website ValoMetrics.com.

$\endgroup$
5
  • 2
    $\begingroup$ Can you show more of the work you’ve done? We like answers to be self-contained and to be honest this looks a bit spammy. $\endgroup$ – Bob Jansen Feb 9 '20 at 20:06
  • $\begingroup$ i added the test i've done to compare the two methods. the link in the answer was added only to help. $\endgroup$ – Valometrics.com Feb 9 '20 at 20:15
  • 2
    $\begingroup$ Did you compare your results with stochastic volatility? Presently, no body really use a constant volatility. $\endgroup$ – Gordon Feb 9 '20 at 21:30
  • $\begingroup$ if LS montecarlo gives bad result with constant volatility, it will be worst for stochastic volatility!! $\endgroup$ – Valometrics.com Feb 9 '20 at 21:47
  • $\begingroup$ May I ask if question is intended to be about equity options or interest rate options ? $\endgroup$ – dm63 Feb 10 '20 at 3:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.