Pricing Bermudan Options under Local Lévy models with default, 27 December 2016

Anastasia Borovykh, Andrea Pascucci, Cornelis W. Oosterlee: We consider a defaultable asset whose risk-neutral pricing dynamics are described by an exponential L ́evy-type martingale. This class of models allows for a local volatility, local default intensity and a locally dependent L ́evy measure. We present a pricing method for Bermudan options based on an analytical approximation of the characteristic function combined with the COS method. Due to a special form of the obtained characteristic function the price can be computed using a fast Fourier transform-based algorithm resulting in a fast and accurate calculation. The Greeks can be computed at almost no additional computational cost. Error bounds for the approximation of the characteristic function as well as for the total option price are given.