American basket options

I used it for american-asian options (also called
hawaiian) and it was
quite stable. though there are two dimensions only
of the problem -
spot price and average strike being path dependant.
A friend of mine
used that for pricing bermudan swaptions, where you
have to model the
whole interest rate term structure which results in
higher
dimensionality and said that sometimes it gives
strange results and
sometimes spurious. In the original L-S algorithm
you conduct
regression only on paths on which the option is
in-the-money. He
extended that, by runing regression on all paths.
The main problem is
the selection of proper polynomials for the
regression. Instead of
that, he was splitting the space for equally sized
small pieces and
was fitting linear model. It was providing fine
results, though was a
bit time consuming.

Best regards,
Wojciech

2007/10/10, Moshe Olshansky <m_olshansky at yahoo.com>:

Thank you!

I heard about that method. Now I will check it

more

carefully.
Is is the only Monte Carlo based method?
Any idea about it's accuracy?

As to programming, I think that there is a version

of

it in QuantLib (the C++ version). Has anybody used

it?

I will share my experiences with the list.

Regards,

Moshe.

--- Wojciech Slusarski

<wojciech.slusarski at gmail.com>

wrote:

There is an algorithm called OLS Monte Carlo, or
Longstaff-Schwarz
algorithm for valuation of american/bermudan

options

using MC method,
though it can be a bit tricky to programm that

for a

portfolio of 10
securities and be a bit unstable, though worth

of

trying. If the
dividends are not high, it should not differ

much

from a european
option priced using Monte Carlo. If dividends

are

high, then the price
should be slightly higher.

Regards,
Wojciech ?lusarski


2007/10/9, Moshe Olshansky

<m_olshansky at yahoo.com>:

This is an OTC traded option.

For a European option one can estimate the

covariance

matrix and then use Monte Carlo (taking into

account

the dividends for each stock). This is pretty
straightforward (well, there may be many ways

to

estimate the covariance matrix but let's use

the

simplest one).

Regards,

Moshe.

--- Krishna Kumar <kriskumar at earthlink.net>

wrote:

I am just curious as to if this is being

traded

in

some market ?.

This is probably not very helpful but I

don't

think

a European style
basket is there in the existing packages.

European

style baskets are
themselves tricky if you want to get the

basket

smile right etc.
American style baskets will be messy.

Cheers
Krishna




Moshe Olshansky wrote:

Hello,

Is there any R code which allows to

calculate

the

price of an American basket option (option

on

a

price

of a portfolio)?
If yes, are there any references to how

accurate

these

calculations are?
If no, can anybody recommend a relatively

easy

to

use

software doing this?

Are there any non Monte Carlo methods to

compute

(even

roughly) the price on an American basket

put

option on

a portfolio of 10 dividend paying stocks

with

6

months

maturity?

Thank you in advance,

Moshe.

list