WOLFRAM|DEMONSTRATIONS PROJECT

Maximizing a Bermudan Put with Two Early-Exercise Temporal Points

​
time to expiry (years)
T
3
starting asset price
S
0
40
strike price
X
45
risk-free rate
r
0.07
dividend yield
δ
0
volatility
σ
0.3
starting temporal points
α T and (1 - α) T
α
0.15
This Demonstration locates the optimal early-exercise temporal points and the corresponding asset critical prices that maximize the value of a Bermudan put with two possible early-exercise temporal points. While European options can be exercised only at the date of expiration, Bermudan options extend the notion of exercise to a finite number of time points during their life. American options, which can be exercised at any time up to maturity, can be approximated (bounded from below) by considering Bermudan options, where the number of early-exercise points becomes considerably dense.