PRICING BERMUDAN OPTION VIA DISCRETE MORSE FLOW
Bermudan option is the options that possible to make an early exercise as in American option. It differs from American option in only one respect. The option restricts the early exercise facility to a finite number that have been specified in the contract. This option has a characteristic in between...
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| Format: | Theses |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/18726 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | Bermudan option is the options that possible to make an early exercise as in American option. It differs from American option in only one respect. The option restricts the early exercise facility to a finite number that have been specified in the contract. This option has a characteristic in between American option and European option. Its value is never greater than American option and it is also never less than the value of standard European option. In this work, the option is calculated by adapting the Black-Scholes PDE, then through the numerical method called DMF (Discrete Morse Flow) the solution is determined. DMF method is a variational method, which work on the time-dependent problems by discretizing time and define a sequence of solutions that minimize the functionals in every time step. In this problem, the sequence of minimizers approach the options value. As a benchmark, DMF method is used first for an American option, then compare with the results by using the common methods, which are finite difference method and Lattice method (Binomial). Furthermore, we use DMF method for pricing Bermudan option, and compare with the results that obtained from Lattice method. |
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