A simple iteration algorithm to price perpetual Bermudan options under the lognormal jump-diffusion-ruin process
Journal
Journal of Futures Markets
Journal Volume
38
Journal Issue
8
Pages
898-924
Date Issued
2018
Author(s)
Abstract
We propose an analytical-form framework for pricing perpetual Bermudan options (PBOs) under the lognormal jump-diffusion-ruin model of Merton (1976). We first analytically derive the holding and early exercise values of PBOs. The optimal exercise boundary of the PBO, determined by equating the holding and early exercise values, is then solved using an iteration algorithm. We finally evaluate the PBO by taking the expectation of the option prices at the subsequent exercisable date and discounting it at the risk-free rate. The numerical results indicate that our method is far more efficient than the competing methods in the literature for pricing PBOs. ? 2018 Wiley Periodicals, Inc.
Subjects
analytical form solution
jump-diffusion process
jump-to-ruin model
optimal exercise boundary
perpetual bermudan option
SDGs
Type
journal article