hard · Quantitative Finance numerical
When using the Longstaff-Schwartz (LSM) method to price an American option with K=105 and current stock S=100, you simulate paths and arrive at a time step where the immediate exercise value is 15. The regression of future discounted cash flows on basis functions (1, S, S^2) yields a predicted continuation value of 12.50.
What is the optimal action at this node?
- Exercise only if the stock price is below the strike.
- Continue holding the option.
- Wait until the next node to re-evaluate.
- Exercise the option immediately.
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