Pricing Bermudan option via Evolutionary discrete morse flow approach

Pricing Bermudan option via Evolutionary discrete morse flow approach

Author		: IRMA PALUPI
Published on	: International Conference On Information and Communication Technology

Abstract

Bermudan option is an options that possible to make an early exercise as in American options. It differs from American option in only one characteristic. 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 never less than the value of standard European option. In this work, Bermudan 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 variation method, which work on the time-dependent problems by discretizing time and define a sequence of solutions that minimize the functional at every time-step. In this problem, the sequence of minimizers approach the option’s value which is searched by using evolutionary algorithm. It is also performed the convergence of early exercise boundary for Bermudan option to American type, and pattern relate to volatility smiles.