TY - JOUR T1 - Efficient Control Variates and Strategies for Bermudan Swaptions in a LIBOR Market Model JF - The Journal of Derivatives SP - 20 LP - 33 DO - 10.3905/jod.2005.517183 VL - 12 IS - 4 AU - Malene Shin Jensen AU - Mikkel Svenstrup Y1 - 2005/05/31 UR - https://pm-research.com/content/12/4/20.abstract N2 - Swaptions with Bermuda-style early exercise features are common in the marketplace, but valuing them correctly presents major computational challenges. The underlying interest rate processes, such as the LIBOR market model, are generally path-dependent and early exercise greatly complicates Monte Carlo analysis. One approach suggested in the literature for such problems is to use computationally efficient methods to derive (hopefully tight) upper and lower bounds for the option value. One way to do this is with the primal-dual algorithm, but obtaining tight bounds still requires a lot of computation. Jensen and Svenstrup show how substantial performance improvements can be achieved by slightly modifying the algorithm, and especially, by using one or more carefully chosen control variates. The article suggests a number of alternative possibilities and provides a valuable performance comparison among them. The winner of the horse race, at least for Bermudan swaptions in the LIBOR market model, is to use a single cap contract as the control variate. This produces a very significant increase in accuracy with only a small increase in computation time. ER -