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Simulating Bermudan Interest Rate Derivatives

In: Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar(Volume II)

Author

Listed:
  • PETER CARR

    (Banc of America Securities, 9 West 57th Street, 40th Floor, New York, NY 10019, USA)

  • GUANG YANG

    (NumeriX LLC, 546 Fifth Avenue, 17th Floor, New York, NY 11553, USA)

Abstract

We use simulation to develop a Markov chain approximation for the value of caplets and Bermudan interest rate derivatives in the Market Model developed by Brace, Gatarek, and Musiela (1995) and Jamshidian (1996a, b). One and two factor versions of the Market Model were numerically studied. Our approach yields numerical values for caplets which are in close agreement with analytical solutions. We also provide numerical solutions for several Bermudan swaptions.

Suggested Citation

  • Peter Carr & Guang Yang, 2001. "Simulating Bermudan Interest Rate Derivatives," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar(Volume II), chapter 11, pages 295-316, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812810663_0011
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    Cited by:

    1. Longstaff, Francis A. & Santa-Clara, Pedro & Schwartz, Eduardo S., 2001. "Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market," Journal of Financial Economics, Elsevier, vol. 62(1), pages 39-66, October.
    2. Leif Andersen & Mark Broadie, 2004. "Primal-Dual Simulation Algorithm for Pricing Multidimensional American Options," Management Science, INFORMS, vol. 50(9), pages 1222-1234, September.

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