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A Series Solution for Bermudan Options

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  • Ingmar Evers

Abstract

This paper presents closed-form expressions for pricing Bermudan options in terms of an infinite series of standard solutions of the Black-Scholes equation. These standard solutions are combined for successive exercise dates using backward induction. At each exercise date, the optimal exercise price of the underlying asset is the root of a one-dimensional nonlinear algebraic equation. Numerical examples demonstrate the convergence of the series to the solution obtained using alternative methods. The work presented precedes a more general approach for Bermudan options on multiple assets involving multi-dimensional Hermite polynomials.

Suggested Citation

  • Ingmar Evers, 2005. "A Series Solution for Bermudan Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(4), pages 337-349.
    • Handle: RePEc:taf:apmtfi:v:12:y:2005:i:4:p:337-349
    DOI: 10.1080/13504860500080263
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