Efficient Control Variates and Strategies for Bermudan Swaptions in a Libor Market Model

This paper concerns the problem of valuing Bermudan swaptions in <p> a Libor market model. In particular we consider various efficiency improvement <p> techniques for a Monte Carlo based valuation method. We <p> suggest a simplification of the Andersen (2000) exercise strategy and find <p> it to be much more efficient. Furthermore, we test a range of control <p> variates for Bermudan swaptions using a control variate technique for <p> American options proposed in Rasmussen (2002). Application of these <p> efficiency improvements in the Primal-Dual simulation algorithm of Andersen <p> & Broadie (2001) improves both upper and lower bounds for the <p> price estimates. For the Primal-Dual simulation algorithm we examine <p> the variance-bias trade-off between the numbers of outer an inner paths. <p> Finally, we demonstrate that the presence of stochastic volatility increases <p> the expected losses from using the simple strategy in Andersen (2000).