The Stochastic Grid Bundling Method: Efficient pricing of Bermudan options and their Greeks

Shashi Jain and Cornelis Oosterlee

Applied Mathematics and Computation, 2015, vol. 269, issue C, 412-431

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: Monte Carlo methods for American Options; Pricing American options; Bermudan options; Greeks for American Options; Stochastic Grid Bundling Method (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:269:y:2015:i:c:p:412-431

DOI: 10.1016/j.amc.2015.07.085

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