# Robustness of the Longstaff-Schwartz LSM Method of Pricing American Derivatives

Robustness of the Longstaff-Schwartz LSM Method of Pricing American Derivatives

This Demonstration shows the Longstaff–Schwartz least squares Monte Carlo method of computing the value of an American put option. We approximate the American option by a Bermudan option with 50 exercise times. The key point of the method is the estimation of conditional expectations by least squares regression on data obtained from Monte Carlo simulation using a basis for the space of -functions. In this Demonstration we use three different kinds of bases. We show the graphs of the functions that estimate conditional expectations at the exercise points on a graph, below the value of the option computed by means of the Longstaff–Schwartz method, and the value computed by means of the binomial tree method with 1000 time steps.

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