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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...
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| Format: | Thesis |
| Language: | English |
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Division of Actuarial Science
2018
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| _version_ | 1867614244289118208 |
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| access_status_str | Open Access |
| author | Rwexana, Kwaku |
| author2 | McWalter, Thomas |
| author_browse | McWalter, Thomas Rwexana, Kwaku |
| author_facet | McWalter, Thomas Rwexana, Kwaku |
| author_sort | Rwexana, Kwaku |
| collection | Thesis |
| description | 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. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/27374 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:48:57.733Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2018 |
| publishDateRange | 2018 |
| publishDateSort | 2018 |
| publisher | Division of Actuarial Science |
| publisherStr | Division of Actuarial Science |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/27374 Pricing a Bermudan option under the constant elasticity of variance model Rwexana, Kwaku McWalter, Thomas Rudd, Ralph Mathematical Finance 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. 2018-02-07T09:10:04Z 2018-02-07T09:10:04Z 2017 Master Thesis Masters MPhil http://hdl.handle.net/11427/27374 eng application/pdf Division of Actuarial Science Faculty of Commerce University of Cape Town |
| spellingShingle | Mathematical Finance Rwexana, Kwaku Pricing a Bermudan option under the constant elasticity of variance model |
| thesis_degree_str | Master's |
| title | Pricing a Bermudan option under the constant elasticity of variance model |
| title_full | Pricing a Bermudan option under the constant elasticity of variance model |
| title_fullStr | Pricing a Bermudan option under the constant elasticity of variance model |
| title_full_unstemmed | Pricing a Bermudan option under the constant elasticity of variance model |
| title_short | Pricing a Bermudan option under the constant elasticity of variance model |
| title_sort | pricing a bermudan option under the constant elasticity of variance model |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/27374 |
| work_keys_str_mv | AT rwexanakwaku pricingabermudanoptionundertheconstantelasticityofvariancemodel |