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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 ...
dm63's user avatar
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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.
Mark Joshi's user avatar
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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 ...
dm63's user avatar
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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 ...
Antoine Conze's user avatar
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 ...
dm63's user avatar
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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 ...
RRL's user avatar
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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 ...
Mark Joshi's user avatar
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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 ...
JUW's user avatar
  • 51
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 ...
dm63's user avatar
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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 ...
dm63's user avatar
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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 ...
Valometrics.com's user avatar
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 ...
MonteCarloSims's user avatar
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.
dm63's user avatar
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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 ...
Arshdeep's user avatar
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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.
dm63's user avatar
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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 ...
Quantuple's user avatar
  • 14.6k

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