7
votes
Bermudan Swaptions - Payer vs. Receiver (LGM)
I’m guessing you are finding that your model overvalues Bermudan receiver options and probably undervalues Bermudan payer options. The rationale for this has more to do with supply and demand than ...
- 16.2k
5
votes
Can call options be priced with Least-Squares Monte Carlo?
American calls on a non-dividend paying stock are worth the same as European ones so there is no point to using least-squares.
- 6,853
4
votes
Accepted
When to exercise a physical Bermudan swaption
You’re generally right. Suppose we have a Bermudian receiver with exercise dates $T_i$ with $\textit{i=1 to (n-1)} $ where $T_n$ is the maturity date of the swap. Then a necessary condition for ...
- 16.2k
4
votes
Valuation of Bermudan option as maximum of relevant European options
You are wrong. Using the maximum of the prices of the European options is equivalent to choosing (and making that choice final) on $t=0$ the date $t_i$ on which you will exercise. As such a choice ...
- 5,622
3
votes
Bermudan Swaption
There is no put call parity for Bermudan swaptions. There are some necessary (but not sufficient ) conditions for exercise of a Bermudan swaption. For example , consider a Bermudan receiver option ...
- 16.2k
3
votes
Accepted
Asian Options Vs Bermudan Options
Asian options are more common in the FX market where corporate hedgers are concerned with the average exchange rate that affects regular streams of foreign denominated revenue.
Bermudan exercise is ...
- 3,595
2
votes
Overpricing Bermudan swaption using Shifted LMM
well there are lots of things to get right...
first you need to the non-callable version right, to get that right requires getting the smile right since a callable range accrual is really just a ...
- 6,853
2
votes
Bermudan Swaptions
Those are all very deep questions. Bermudan swaptions are very complicated products despite that they are one of the most actively traded rates vol products. Below are a few thoughts from my ...
- 51
1
vote
Convergence rate of Bermudan to American option
Is this paper useful? Discussed usage of Richardson extrapolation for such purposes
http://www.fin.ntu.edu.tw/~conference2002/proceding/5-4.pdf
- 16.2k
1
vote
Bermudan option exercise probability when rates rise
Ok as an example consider a 1yr-10yr 3pct Bermudan payer (the right to pay fixed at 3pct vs libor starting at any annual date from 1yr onwards with a maturity of 11yrs from today). For simplicity ...
- 16.2k
1
vote
Inequality involving Co-Terminal/Co-Initial American vs Bermudan Swaptions
I have the following idea: consider the limit of low volatility. Then, exercise strategy is known simply by comparing coupon with remaining swap rate. If the addition of the additional period at ...
- 16.2k
1
vote
Lower bound for Bermudan Option Price
It depends of the convexity of the function f. I guess you already heard about the fact that american call price is the same as european call price when there is no dividends. It is still valid for ...
- 852
1
vote
Accepted
RQuantLib: BermudanSwaption(): effective date later than or equal to termination date
I attempted an answer to a similar QuantLib negative interest rate question here.
I think you'll find that the answer to your question is similar. However, in the Github Bermudan code I do not see a ...
- 395
1
vote
Bermudan Swaptions
See Blyth "An Introduction to Quantitative Finance" which has a whole chapter on the elementary properties of Bermudian swaptions and answers pretty much all of your questions.
- 16.2k
1
vote
Valuation of Bermudan option as maximum of relevant European options
Without the math, look at it this way: I give you a die to toss. You can toss it thrice and take the payoff as the number on the die. On each turn you can either accept the payoff or move on. At the ...
- 1,865
1
vote
Overpricing Bermudan swaption using Shifted LMM
When you say 'overprice' I assume you mean model price > market price. In my experience this is true for all reasonable models. It's due to excessive supply of the Bermudan structure in the market.
- 16.2k
1
vote
Can call options be priced with Least-Squares Monte Carlo?
Mark Joshi's answer is totally correct. But I would appreciate to elaborate a little.
In textbooks you often read the exact same argument he pointed out to you.
In practice however, in the equities ...
- 14.5k
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