Iterating cancellable snowballs and related exotics
Effective valuation procedures for callable exotics are a thorny problem. Standard methods reveal limitations in pricing many-dimensional and path-dependent products, such as cancellable snowballs. Christian Bender, Anastasia Kolodko and John Schoenmakers ally these methods with their recent iterative methodology to fill the final gap
This article proposes a valuation method for exotic cancellable and callable structures in a multi-factor Libor model. These structures are path-dependent in the sense that, after cancelling or calling, one cancels a sequence of cashflows or receives a sequence of cashflows in the future, respectively. The method combines a Monte Carlo improvement procedure for standard Bermudans developed and extended in Kolodko & Schoenmakers (2006) and Bender & Schoenmakers (2006), with popular approaches by
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