ABSTRACT
This chapter is devoted to the pricing of Bermudan style Libor derivatives by Monte Carlo methods. A Bermudan Libor derivative is an American option on a pay-off function of forward Libors, which may be called at a finite number of exercise dates. As such we have a high dimensional pricing problem due to the typically high dimension of the underlying Libor process. Generally, evaluation of American style derivatives on a high dimensional system of underlyings is considered a perennial problem for the last decades. On the one hand such high dimensional options are difficult, if not impossible, to compute by PDE methods for free boundary value problems. On the other hand Monte Carlo simulation, which is for high dimensional European options an almost canonical alternative to PDE solving, is for American options highly non-trivial since the (optimal) exercise boundary is usually unknown.
