Pricing a Bermudan option under the constant elasticity of variance model

This dissertation investigates the computational efficiency and accuracy of three methodologies in the pricing of a Bermudan option, under the constant elasticity of variance (CEV) model. The pricing methods considered are the finite difference method, least squares Monte Carlo method and recursive marginal quantization (RMQ) method. Specific emphasis will be on RMQ, as it is the most recent method. A plain vanilla European option is initially priced using the above mentioned methods, and the results obtained are compared to the Black-Scholes option pricing formula to determine their viability as pricing methods. Once the methods have been validated for the European option, a Bermudan option is then priced for these methods. Instead of using the Black-Scholes option pricing formula for comparison of the prices obtained, a high-resolution finite difference scheme is used as a proxy in the absence of an analytical solution. One of the main advantages of the recursive marginal quantization (RMQ) method is that the continuation value of the option is computed at almost no additional computational cost, this with other contributing factors leads to a computationally efficient and accurate method for pricing.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2017

Author dc:creator

• Rwexana, Kwaku

Advisors dc:contributor.advisor

• McWalter, Thomas
• Rudd, Ralph

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/27374

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/27374