# Tag Info

5

American calls on a non-dividend paying stock are worth the same as European ones so there is no point to using least-squares.

4

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 theory. That’s because every time a callable bond is issued and swapped, dealers buy Bermudan receiver options, so there’s a huge supply. For Bermudan payers ...

4

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 would be sub-optimal, you would be giving up value. Therefore the Bermuda option is worth more than the maximum of the prices of the European options.

3

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 most common for interest rate swaptions. They provide flexibility in choosing when to exercise for cancelling a swap without the added cost of an unnecessary ...

2

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 bunch of digitals with timing effects. these days discounting and forwarding are done with different curves so you'll need to get that right too. then you'll ...

2

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 exerciseable every year into a swap with remaining maturity of 10 years. Then for optimal exercise it is necessary that the spot starting swap rate with ...

1

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 assume a flat yield curve. If rates are 1pct, the probability of exercise on the first date is low (a long way to cross the 3pct strike). If rates are 6pct, the ...

1

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 the start creates an optimal exercise at the first possible date for both $A$ and $B$, then $A=B$ after the addition, whereas it is possible that $A>B$ before ...

1

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 bermudan call as its price is between american call price and european call price. Please have a look on this document for more details: http://www.stat....

1

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 similar 'Displacement' variable to my previous answer. It appears that the problem of negative interest in QuantLib derives from not being able to place a ...

1

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 last throw, you must accept the payoff. Your logic would state that this product has value equivalent to tossing a die once and only once (here, all 'Europeans'...

1

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.

1

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 world, you almost always have to deal with dividends. So it is rather the American put which becomes similar to its European counterpart, and the American call ...

1

With timesteps of one month, and the ability to exercise after 9 months, you still need to consider early exercise at node 9 (representing the start of month 10, just as node 0 represents start of month 1). Before the American part kicks in, the tree methodology will revert back to European style, in that you do not have to consider early exercise at that ...

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