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The pricing of Bermudan-style options on correlated assets

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  • Sandra Peterson
  • Richard Stapleton

Abstract

In this paper, we present a methodology for approximating a correlated multivariate-lognormal process with a recombining or “simple” multivariate-binomial process. The method represents an extension and implementation of previous work by Nelson and Ramaswamy (1990) and Ho, Stapleton and Subrahmanyam (1995) on diffusion approximation. The general method is illustrated by pricing a Bermudan-style put option on the minimum of three asset prices, and by pricing Bermudan-style options on bonds, where the value of the bond at a point in time depends upon the interest rate in two currencies and the foreign exchange rate. This type of structure, known as the “Power Reverse Dual” is a popular product in the case of Japanese Yen-US Dollar currencies. Copyright Kluwer Academic Publishers 2002

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  • Sandra Peterson & Richard Stapleton, 2002. "The pricing of Bermudan-style options on correlated assets," Review of Derivatives Research, Springer, vol. 5(2), pages 127-151, May.
    • Handle: RePEc:kap:revdev:v:5:y:2002:i:2:p:127-151
    DOI: 10.1023/A:1016580628872
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    References listed on IDEAS

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    1. Chan, K C, et al, 1992. "An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-1227, July.
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    4. Sundaresan, Suresh, 1991. "Futures Prices on Yields, Forward Prices, and Implied Forward Prices from Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(3), pages 409-424, September.
    5. Amin, Kaushik I & Bodurtha, James N, Jr, 1995. "Discrete-Time Valuation of American Options with Stochastic Interest Rates," The Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 193-234.
    6. Amin, Kaushik I., 1991. "On the Computation of Continuous Time Option Prices Using Discrete Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(4), pages 477-495, December.
    7. Ho, Teng-Suan & Stapleton, Richard C & Subrahmanyam, Marti G, 1995. "Multivariate Binomial Approximations for Asset Prices with Nonstationary Variance and Covariance Characteristics," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 1125-1152.
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    Cited by:

    1. Sripad K. Devalkar & Ravi Anupindi & Amitabh Sinha, 2011. "Integrated Optimization of Procurement, Processing, and Trade of Commodities," Operations Research, INFORMS, vol. 59(6), pages 1369-1381, December.
    2. Sripad K. Devalkar & Ravi Anupindi & Amitabh Sinha, 2018. "Dynamic Risk Management of Commodity Operations: Model and Analysis," Manufacturing & Service Operations Management, INFORMS, vol. 20(2), pages 317-332, May.

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