A. Kolodko and J. Schoenmakers (Germany)
Bermudan options, optimal stopping, Monte Carlo simula tion, LIBOR market model
We present an iterative procedure for computing the opti mal Bermudan stopping time. We prove convergence and, as a consequence, the method allows for approximation of the Snell envelope from below. By using duality, we then deduce a convergent procedure for approximating the Snell envelope from above as well. The presented algorithm may be considered generic for all discrete optimal stopping problems. We provide numerical examples for Bermudan swaptions in the context of a LIBOR market model.
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