In this paper, inspired by the Least-squares method introduced by Longstaff and Schwartz (2001), we develop an more efficient Monte Carlo technique to price the Hybrid options. Hybrid option, which is by nature with exotic properties and form, is a combination of two kinds of derivatives, for example a combination of an interest rate derivative with an equity derivative.Therefore, it is a very useful instrument for pension funds to control their funding ratio within required levels. Hybrid payoffs strongly depend both on the evolution of the yield curve as well as the equity underlying. Unfortunately there are no closed-form solutions available for a general (non-zero) correlation between the interest rate and equity process. In the absence of closed-form formulas, we try to price the hybrid options by an modifiedLeast-squares method in Monte Carlo simulation.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

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