#### A
matched asymptotic expansions approach to continuity corrections for
discretely sampled options. Part 2: Bermudan options

by Sam Howison

Abstract

We discuss the `continuity correction' that should be applied

to connect the prices of discretely sampled American put options (i.e.

Bermudan options) and their continuously-sampled equivalents. Using a

matched asymptotic expansions approach we compute the correction and

relate it to that discussed by Broadie, Glasserman \& Kou

(\emph{Mathematical Finance} {\bf 7}, 325 (1997)) for barrier options. In

the Bermudan case, the continuity correction is an order of magnitude

smaller than in the corresponding barrier problem. We also show that the

optimal exercise boundary in the discrete case is slightly higher than in

the continuously sampled case.

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