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Geske Johnson pricing of Long Maturity American and Infinite Bermudan Options

Research output: Working paper

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Abstract

This paper describes general Bermudan options by interexercise time and time to final maturity; a surface with European, American and Infinite Bermudam options as limits, allowing Geske Johnson (1984) two point pricing to be extended to consider time to maturity. A solution is presented for Infinite Bermudans and two point pricing schemes are developed which converge to the Merton solution for long maturity American options and short interexercise Infinite Bermudans. The Geske Johnson extrapolation assumptions are examined and another class of series sum approximations is developed using many two point prices. Comparisons to benchmark methods are made.