This paper describes a practical simulation-based algorithm, which we call the Stochastic Grid Bundling Metho d(SGBM) for pricing multdimensional 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.
Additional Metadata
Keywords Monte Carlo methods for American Options, Pricing American options, Bermudan options, Greeks for American Options, Stochastic Grid Bundling Method
THEME Null option (theme 11)
Publisher Elsevier
Persistent URL dx.doi.org/10.1016/j.amc.2015.07.085
Journal Applied Mathematics and Computation
Citation
Jain, S, & Oosterlee, C.W. (2015). The Stochastic Grid Bundling Method :Efficient pricing of Bermudan options and their Greeks. Applied Mathematics and Computation, 269, 412–431. doi:10.1016/j.amc.2015.07.085