Longstaff-Schwartz Model

The Longstaff– Schwartz Model is a financial method used to estimate the fair value of American-style options, which can be exercised anytime before expiration. It relies on simulating many possible future stock price paths and then using statistical techniques (regression) to determine the optimal stopping point—that is, when exercising the option is most beneficial. Essentially, it helps investors decide the best time to exercise an option by analyzing possible future scenarios and their expected payoffs, making it a practical approach for valuing complex financial derivatives that have flexible exercise features.