Adapted Downhill Simplex Method for Pricing Convertible Bonds

zbMATH Open1164.62083arXiv0710.0241MaRDI QIDQ3608283FDOQ3608283

Authors: Kateryna Mishchenko, Volodymyr Mishchenko, Anatoliy Malyarenko 

Publication date: 28 February 2009

Abstract: The paper is devoted to modeling optimal exercise strategies of the behavior of investors and issuers working with convertible bonds. This implies solution of the problems of stock price modeling, payoff computation and min-max optimization. Stock prices (underlying asset) were modeled under the assumption of the geometric Brownian motion of their values. The Monte Carlo method was used for calculating the real payoff which is the objective function. The min-max optimization problem was solved using the derivative-free Downhill Simplex method. The performed numerical experiments allowed to formulate recommendations for the choice of appropriate size of the initial simplex in the Downhill Simplex Method, the number of generated trajectories of underlying asset, the size of the problem and initial trajectories of the behavior of investors and issuers.

Full work available at URL: https://arxiv.org/abs/0710.0241

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zbMATH Keywords

Monte Carlo simulationoptimal strategiesminimax optimization problem

Mathematics Subject Classification ID

Numerical optimization and variational techniques (65K10) Applications of statistics to actuarial sciences and financial mathematics (62P05) Minimax problems in mathematical programming (90C47)

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