Model Independent Bounds for Accreting and Amortising Bermudan Swaptions

Abstract

We derive model independent bounds for amortising and accreting Bermudan swaptions in terms of portfolios of standard Bermudan swaptions. In addition to the well-known upper bounds, we derive new lower bounds for both amortisers and accreters. Numerical results show the bounds to be tight in many situations. These two sided bounds provide useful checks against model arbitrage and super-replication of both long and short positions in the non-standard Bermudan.