Valuing American Options by Simulation: A Simple Least-Squares Approach
- Topics:
- Commercial Lending
- Tags:
- Approach,
- Asset Management,
- Business Operations,
- Operational Planning,
- Option,
- Productivity,
- Technique
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Overview: This article presents a simple yet powerful new approach for approximating the value of American options by simulation. The key to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily applicable in path-dependent and multifactor situations where traditional finite difference techniques cannot be used. It also illustrate this technique with several realistic examples including valuing an option when the underlying asset follows a jump-diffusion process and valuing an American swaption in a 20-factorstring model of the term structure.
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Format: PDF | Size: 202KB | Date: Apr 2001 | Pages: 18
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