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This tools illustrated Bermudan option pricing using Monte Carlo simulation.
It serves as a companion to Chapter 15 of Mathematical Finance.
Upon each exercise date T1, T2,...,Tn the holder of the Bermudan has the right to either exercise and receive Ni * (S(Ti) - Ki) or receive a shorter Bermudan option on the remaining exercises Tj > Ti. The last option pays either Nn * (S(Tn) - Kn) or nothing. Setting notional negative will give you a put instead of a call.
Various methods to estimate the exercise boundary are implemented:
The exercise boundary is visualized in a scatter plot, see Figure 1. The picture shows the situation at a specific exercise date. Each dot represents the value upon hold depending on the value upon exercise for a specific simulation path. The conditional expectation is shown as a function of the value upon exercise (blue line). The exercise region (green) is defined as the paths having exercise values (yellow line) above the expected value upon hold (blue line).
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