The Stochastic Grid Bundling Method: Efficient Pricing of Bermudan Options and their Greeks

32 Pages Posted: 17 Jul 2013 Last revised: 26 Oct 2014

See all articles by Shashi Jain

Shashi Jain

Indian Institute of Science (IISc) - Deptartment of Management Studies

Cornelis W. Oosterlee

Center for Mathematics and Computer Science (CWI)

Date Written: September 4, 2013

Abstract

This paper describes a practical simulation-based algorithm, which we call the Stochastic Grid Bundling Method (SGBM) for pricing multi-dimensional Bermudan (i.e. discretely exercisable) options. The method generates a direct estimator of the option price, an optimal early-exercise policy as well as a lower bound value for the option price. An advantage of SGBM is that the method can be used for fast approximation of the Greeks (i.e., derivatives with respect to the underlying spot prices, such as delta, gamma, etc) for Bermudan-style options. Computational results for various multi-dimensional Bermudan options demonstrate the simplicity and efficiency of the algorithm proposed.

Keywords: Pricing American Options using Monte Carlo Methods, Greeks for Bermudan option, Monte Carlo methods for pricing Bermudan options

JEL Classification: C15, C61, C63

Suggested Citation

Jain, Shashi and Oosterlee, Cornelis W., The Stochastic Grid Bundling Method: Efficient Pricing of Bermudan Options and their Greeks (September 4, 2013). Available at SSRN: https://ssrn.com/abstract=2293942 or http://dx.doi.org/10.2139/ssrn.2293942

Shashi Jain (Contact Author)

Indian Institute of Science (IISc) - Deptartment of Management Studies ( email )

Indian Institute of Science
Bangalore
India

Cornelis W. Oosterlee

Center for Mathematics and Computer Science (CWI) ( email )

P.O. Box 94079
Amsterdam, NL-1090 GB
Netherlands

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