Pricing time-capped American options using Least Squares Monte Carlo method
By: Paweł Stȩpniak, Zbigniew Palmowski
Potential Business Impact:
Helps figure out the best price for tricky stock options.
In this paper, we adopt the least squares Monte Carlo (LSMC) method to price time-capped American options. The aforementioned cap can be an independent random variable or dependent on asset price at random time. We allow various time caps. In particular, we give an algorithm for pricing the American options capped by the first drawdown epoch. We focus on the geometric L\'evy market. We prove that our estimator converges to the true price as one takes the discretisation step tending to zero and the number of trajectories going to infinity.
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