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

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  • Jain, Shashi
  • Oosterlee, Cornelis W.

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.

Suggested Citation

  • Jain, Shashi & Oosterlee, Cornelis W., 2015. "The Stochastic Grid Bundling Method: Efficient pricing of Bermudan options and their Greeks," Applied Mathematics and Computation, Elsevier, vol. 269(C), pages 412-431.
    • Handle: RePEc:eee:apmaco:v:269:y:2015:i:c:p:412-431
    DOI: 10.1016/j.amc.2015.07.085
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