Pricing Bermudan Swaptions in the LIBOR Market Model

Specialeforsvar: Alexander Rosengaard

Titel: Pricing Bermudan Swaptions in the LIBOR Market Model

Abstract:  In this thesis the LIBOR Market Model is examined and the dynamics of the discrete forward rates are deduced under a common measure in order to price swaptions. Two ways of pricing Bermudan swaptions are introduced. Andersen’s approach that is based on a given strategy, which determines the optimal stopping rule. The other is called Least Squares Monte Carlo where regression is the key component in computing continuation values. The pricing is done by Monte Carlo simulation of forward rates, and then performed in two separate steps. One step to calibrate the parameters of the given method and then a step to price the Bermudan swaption. Several numerical experiments are run on these methods, which leads to interesting discoveries. At last the pricing problem of the Bermudan swaption is expanded by the dual problem, which creates a way of calculating an upper boundary for the true price. This is implemented via a regression based method.

Vejleder: Rolf Poulsen
Censor:   Thomas Kokholm, Aarhus Universitet