Pricing Early-exercise options

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Pricing Early-exercise options GPU Acceleration of SGBM method Delft University of Technology - Centrum Wiskunde & Informatica Álvaro Leitao Rodríguez and Cornelis W. Oosterlee Lausanne - December 4, 2016 A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 1 / 28

Outline 1 Definitions 2 Basket Bermudan Options 3 Stochastic Grid Bundling Method 4 Parallel GPU Implementation 5 Results 6 Conclusions A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 2 / 28

Definitions Option A contract that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Investopedia. Option price The fair value to enter in the option contract. In other words, the (discounted) expected value of the contract. V t = D t E [f (S t )] where f is the payoff function, S the underlying asset, t the exercise time and D t the discount factor. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 3 / 28

Definitions - cont. Pricing techniques Stochastic process, S t. Simulation: Monte Carlo method. PDEs: Feynman-Kac theorem. Types of options - Exercise time European: End of the contract, t = T. American: Anytime, t [0, T ]. Bermudan: Some predefined times, t {t1,..., t M } Many others: Asian, barrier,... A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 4 / 28

Definitions - cont. Early-exercise option price American: Bermudan: V t = V t = Pricing early-exercise options sup D t E [f (S t )]. t [0,T ] sup D t E [f (S t )]. t {t1,...,t M } PDEs: Hamilton-Jacobi-Bellman equation. Simulation: Least-squares method (LSM), Longstaff and Schwartz. Stochastic Grid Bundling method (SGBM) [JO15]. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 5 / 28

Basket Bermudan Options Right to exercise at a set of times: t {t 0 = 0,..., t m,..., t M = T }. d-dimensional underlying process: S t = (S 1 t,..., S d t ) R d. Intrinsic value of the option: h t := h(s t ). The value of the option at the terminal time T: V T (S T ) = f (S T ) = max(h(s T ), 0). The conditional continuation value Q tm, i.e. the discounted expected payoff at time t m : Q tm (S tm ) = D tm E [ V tm+1 (S tm+1 ) S tm ]. The Bermudan option value at time t m and state S tm : V tm (S tm ) = f (S T ) = max(h(s tm ), Q tm (S tm )). Value of the option at the initial state S t0, i.e. V t0 (S t0 ). A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 6 / 28

Basket Bermudan options scheme Figure: d-dimensional Bermudan option A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 7 / 28

Stochastic Grid Bundling Method Dynamic programming approach. Simulation and regression-based method. Forward in time: Monte Carlo simulation. Backward in time: Early-exercise policy computation. Step I: Generation of stochastic grid points {S t0 (n),..., S tm (n)}, n = 1,..., N. Step II: Option value at terminal time t M = T V tm (S tm ) = max(h(s tm ), 0). A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 8 / 28

Stochastic Grid Bundling Method (II) Backward in time, t m, m M,: Step III: Bundling into ν non-overlapping sets or partitions B tm 1 (1),..., B tm 1 (ν) Step IV: Parameterizing the option values Z(S tm, α β t m ) V tm (S tm ). Step V: Computing the continuation and option values at t m 1 Q tm 1 (S tm 1 (n)) = E[Z(S tm, α β t m ) S tm 1 (n)]. The option value is then given by: V tm 1 (S tm 1 (n)) = max(h(s tm 1 (n)), Q tm 1 (S tm 1 (n))). A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 9 / 28

Bundling Original: Iterative process (K-means clustering). Problems: Too expensive (time and memory) and distribution. New technique: Equal-partitioning. Efficient for parallelization. Two stages: sorting and splitting. SORT SPLIT Figure: Equal partitioning scheme A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 10 / 28

Parametrizing the option value Basis functions φ 1, φ 2,..)., φ K. In our case, Z (S tm, αt β m depends on S tm only through φ k (S tm ): ) K Z (S tm, αt β m = αt β m (k)φ k (S tm ). k=1 Computation of αt β m (or α t β m ) by least squares regression. The αt β m determines the early-exercise policy. The continuation value: [( K ) ] Q tm 1 (S tm 1 (n)) = D tm 1 E α t β m (k)φ k (S tm ) S tm 1 k=1 K = D tm 1 α t β m (k)e [ ] φ k (S tm ) S tm 1. k=1 A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 11 / 28

Basis functions Choosing φ k : the expectations E [ φ k (S tm ) S tm 1 ] should be easy to calculate. The intrinsic value of the option, h( ), is usually an important and useful basis function. For example: Geometric basket Bermudan: h(s t ) = Arithmetic basket Bermudan: ( d δ=1 S δ t d ) 1 d h(s t ) = 1 d δ=1 S δ t m For S t following a GBM: expectations analytically available. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 12 / 28

Estimating the option value SGBM has been developed as duality-based method. Provide two estimators (confidence interval). Direct estimator (high-biased estimation): ( V tm 1 (S tm 1 (n)) = max h ( S tm 1 (n) ), Q ( tm 1 Stm 1 (n) )), E[ V t0 (S t0 )] = 1 N N V t0 (S t0 (n)). n=1 Path estimator (low-biased estimation): τ (S(n)) = min{t m : h (S tm (n)) Q tm (S tm (n)), m = 1,..., M}, v(n) = h ( S τ (S(n))), 1 V t0 (S t0 ) = lim NL N L N L v(n). n=1 A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 13 / 28

Parallel SGBM on GPU NVIDIA CUDA platform. Parallel strategy: two parallelization stages: Forward: Monte Carlo simulation. Backward: Bundles Oportunity of parallelization. Novelty in early-exercise option pricing methods. Two implementations K-means vs. Equal-partitioning: K-means: sequential parts. K-means: transfers between CPU and GPU cannot be avoided. K-means: all data need to be stored. K-means: Load-balancing. Equal-partitioning: fully parallelizable. Equal-partitioning: No transfers. Equal-partitioning: efficient memory use. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 14 / 28

Parallel SGBM on GPU - Forward in time One GPU thread per Monte Carlo simulation. Random numbers on the fly : curand library. Compute intermediate results: Expectations. Intrinsic value of the option. Equal-partitioning: sorting criterion calculations. Intermediate results in the registers: fast memory access. Original bundling: all the data still necessary. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 15 / 28

Parallel SGBM on GPU - Forward in time Figure: SGBM Monte Carlo A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 16 / 28

Parallel SGBM on GPU - Backward in time One parallelization stage per exercise time step. Sort w.r.t bundles: efficient memory access. Parallelization in bundles. Each bundle calculations (option value and early-exercise policy) in parallel. All GPU threads collaborate in order to compute the continuation value. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 17 / 28

Parallel SGBM on GPU - Backward in time Figure: SGBM backward stage A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 18 / 28

Parallel SGBM on GPU - Backward in time Figure: SGBM backward stage A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 19 / 28

Results Accelerator Island system of Cartesius Supercomputer. Intel Xeon E5-2450 v2. NVIDIA Tesla K40m. C-compiler: GCC 4.4.7. CUDA version: 5.5. Geometric and arithmetic basket Bermudan put options: S t0 = (40,..., 40) R d, X = 40, r t = 0.06, σ = (0.2,..., 0.2) R d, ρ ij = 0.25, T = 1 and M = 10. Basis functions: K = 3. Multi-dimensional Geometric Brownian Motion. Euler discretization, δt = T /M. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 20 / 28

Equal-partitioning: convergence test 1.5 1.45 1.4 1.35 5d Reference price 5d Direct estimator 5d Path estimator 10d Reference price 10d Direct estimator 10d Path estimator 15d Reference price 15d Direct estimator 15d Path estimator 1.5 1.4 1.3 5d Direct estimator 5d Path estimator 10d Direct estimator 10d Path estimator 15d Direct estimator 15d Path estimator Vt0 (St0) 1.3 Vt0 (St0) 1.2 1.25 1.1 1.2 1.15 1 1.1 1 4 16 Bundles ν (a) Geometric basket put option 0.9 1 4 16 Bundles ν (b) Arithmetic basket put option Figure: Convergence with equal-partitioning bundling technique. Test configuration: N = 2 18 and t = T /M. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 21 / 28

Speedup Geometric basket Bermudan option k-means equal-partitioning d = 5 d = 10 d = 15 d = 5 d = 10 d = 15 C 604.13 1155.63 1718.36 303.26 501.99 716.57 CUDA 35.26 112.70 259.03 8.29 9.28 10.14 Speedup 17.13 10.25 6.63 36.58 54.09 70.67 Arithmetic basket Bermudan option k-means equal-partitioning d = 5 d = 10 d = 15 d = 5 d = 10 d = 15 C 591.91 1332.68 2236.93 256.05 600.09 1143.06 CUDA 34.62 126.69 263.62 8.02 11.23 15.73 Speedup 17.10 10.52 8.48 31.93 53.44 72.67 Table: SGBM total time (s) for the C and CUDA versions. Test configuration: N = 2 22, t = T /M and ν = 2 10. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 22 / 28

Speedup - High dimensions Geometric basket Bermudan option ν = 2 10 ν = 2 14 d = 30 d = 40 d = 50 d = 30 d = 40 d = 50 C 337.61 476.16 620.11 337.06 475.12 618.98 CUDA 4.65 6.18 8.08 4.71 6.26 8.16 Speedup 72.60 77.05 76.75 71.56 75.90 75.85 Arithmetic basket Bermudan option ν = 2 10 ν = 2 14 d = 30 d = 40 d = 50 d = 30 d = 40 d = 50 C 993.96 1723.79 2631.95 992.29 1724.60 2631.43 CUDA 11.14 17.88 26.99 11.20 17.94 27.07 Speedup 89.22 96.41 97.51 88.60 96.13 97.21 Table: SGBM total time (s) for a high-dimensional problem with equal-partitioning. Test configuration: N = 2 20 and t = T /M. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 23 / 28

Conclusions Efficient parallel GPU implementation. Extend the SGBM s applicability: Increasing dimensionality. New bundling technique. Future work: Explore the new CUDA 7 features: cusolver (QR factorization). CVA calculations. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 24 / 28

References Shashi Jain and Cornelis W. Oosterlee. The Stochastic Grid Bundling Method: Efficient pricing of Bermudan options and their Greeks. Applied Mathematics and Computation, 269:412 431, 2015. Álvaro Leitao and Cornelis W. Oosterlee. GPU Acceleration of the Stochastic Grid Bundling Method for Early-Exercise options. International Journal of Computer Mathematics, 92(12):2433 2454, 2015. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 25 / 28

Acknowledgements Thank you for your attention A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 26 / 28

Appendix Geo. basket Bermudan option - Basis functions: φ k (S tm ) = ( ( ) k 1 d St δ m ) 1 d, k = 1,..., K, δ=1 The expectation can directly be computed as: E [ φ k (S tm ) S tm 1 (n) ] = ( P tm 1 (n)e ( ) ) k 1 µ+ (k 1) σ2 t 2, where, ( d P tm 1 (n) = St δ m 1 (n) δ=1 ) 1 d ( d, µ = 1 d δ=1 r q δ σ2 δ 2 ), σ 2 = 1 d 2 2 d d Cpq 2. p=1 q=1 A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 27 / 28

Appendix Arith. basket Bermudan option - Basis functions: φ k (S tm ) = ( 1 d ) k 1 d St δ m, k = 1,..., K., δ=1 The summation can be expressed as a linear combination of the products: ( d ) k St δ m = δ=1 k 1 +k 2 + +k d =k ( k k 1, k 2,..., k d ) 1 δ d ( S δ t m ) kδ, And the expression for Geometric basket option can be applied. A. Leitao & Kees Oosterlee (TUD & CWI) SGBM on GPU Lausanne - December 4, 2016 28 / 28