Bermudan Swaption

The underlying security of a single currency Bermudan swaption is an interest-rate swap, which is specified by respective payer and receiver legs. Each of the legs above can pay a fixed rate, Libor or CMS rate. The owner of the Bermudan swaption can choose to enter into the swap above at certain pre-defined exercise times

The pricing method is based on Jamshidian’s Libor rate model (i.e., where Libor rates are modeled simultaneously under the spot Libor measure). Furthermore, we value a Bermudan swaption based on the Monte Carlo technique presented by Longstaff and Schwartz towards American style pricing.

We consider an interest-rate swap consisting of respective receiver and payer legs. Here the payer leg is specified by

Here R can be a fixed rate, a Libor or a CMS rate. In the case of an n-period Libor rate,

We price a Bermudan style swaption using a Monte Carlo technique, which is based on the approach proposed by Longstaff and Schwartz towards American style pricing using simulation. In particular, at every exercise time, we must solve a linear least squares problem, and then decide whether to exercise the option.

In the above trades off accuracy for efficiency in calculation speed; we investigate, numerically, the accuracy of the approximation above with respect to European swaption pricing

Bermudan Swaption

• Ref
• Archive bermudan pdf
• gitbook forward
• github three
• core lmm pdf
• core lmm