Abstract
We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential Lévy-type martingale. This class of models allows for a local volatility, local default intensity and a locally dependent Lévy measure. We present a pricing method for Bermudan options based on an analytical approximation of the characteristic function combined with the COS method. Due to a special form of the obtained characteristic function the price can be computed using a fast Fourier transform-based algorithm resulting in a fast and accurate calculation.
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Borovykh, A., Pascucci, A., Oosterlee, C.W. (2017). Bermudan Option Valuation Under State-Dependent Models. In: Londoño, J., Garrido, J., Jeanblanc, M. (eds) Actuarial Sciences and Quantitative Finance. ICASQF 2016. Springer Proceedings in Mathematics & Statistics, vol 214. Springer, Cham. https://doi.org/10.1007/978-3-319-66536-8_6
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DOI: https://doi.org/10.1007/978-3-319-66536-8_6
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