Research

Calibration of Bermudan Swaptions using limited data

The focus of this thesis is on the risk neutral valuation of Bermudan swaptions and its application to pricing situations where observed market data used for calibration is limited. By exploring the properties of the solution to the optimal stopping problem that specifies the price process of these instruments, a general valuation method suited for practical computations is suggested. The valuation method is based on restricting the evolution of the short rate process to that of a recombining binomial tree and is able to produce fast price estimates of Bermudan swaptions based on limited input data when specifying the dynamics of the short rate process to the Ho-Lee model.