Backward induction for future values
Here, Alexandre Antonov, Serguei Issakov and Serguei Mechkov generalise the American Monte Carlo method to efficiently calculate future values (or exposures) of derivatives using an arbitrage-free model. The resulting algorithm is especially attractive for exotic portfolios
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The American (or least squares) Monte Carlo method in its original formulation (see, for example, Carriere 1996; Longstaff & Schwartz 2001; and see also Glasserman (2003) for a more complete list of references) uses a backward induction to compute the continuation value of a derivative. In this article we generalise the backward induction to compute a future value of a derivative that corresponds to the full instrument value on future dates with effectsof
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