Financial Mathematics, Derivatives and Structured Products by Raymond H. Chan & Yves ZY. Guo & Spike T. Lee & Xun Li

Author:Raymond H. Chan & Yves ZY. Guo & Spike T. Lee & Xun Li
Language: eng
Format: epub
ISBN: 9789811336966
Publisher: Springer Singapore

2.determine the optimal exercise decision on each generated path for the exercise decision, we need to compare exercise value and continuation value

in LSM, the continuation value is estimated with the least-square method

3.based on the exercise decisions for each generated path fixed in the precedent step, the option price can be simulated with the normal Monte Carlo.

The method is explained through the following example from the original paper [50].

Example 15.2

Consider a 3-year put option with 2 exercise dates (year 1 and year 2) with initial spot = 1, strike = 1.1 and one year discount factor = 0.94176.

Table 15.1 shows 8 simulated paths at inception and the end of each year. We can see the option payoff at year 3 conditional on no early exercise in Table 15.2. Table 15.1Simulated stock price paths

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