Forest of stochastic meshes: A new method for valuing high-dimensional swing options |
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| Authors: | T.J. Marshall |
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| Affiliation: | a Department of Applied Mathematics, The University of Western Ontario, 1151 Richmond Street North, London, ON, Canada, N6A 5B7b Department of Statistical and Actuarial Sciences, The University of Western Ontario, 1151 Richmond Street North, London, ON, Canada, N6A 5B7 |
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| Abstract: | Swing options generalize American-style options as they allow the holder multiple exercise rights and control over the exercise amounts. In this work, we replace the standard (binomial) trees in the forest of trees algorithm with stochastic meshes, yielding the forest of stochastic meshes; a simulation-based method for valuing high-dimensional swing options. This new method handles general price processes and payoffs, produces high- and low-biased consistent estimators and a true option price confidence interval. |
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| Keywords: | Swing options Monte Carlo simulation Dynamic programming Stochastic mesh Multiple state variables Forest of trees |
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