I'm implementing a lot of stochastic models on my own for fun and I'm quite puzzled about the usual procedure concerning the correctnes of Bermudan swaptions prices and greeks ? How can you tell that the price that you get from the implementation/model is correct?

Should I price the same instrument using the same model but different methods (MC, PDE, Trees) ?

Should I price the same instrument using different models and if they look similar it means that the price is correct ?

Should I try to price degenerate cases of Bermudan swaptions like bermudan swaptions with strike 0 and just see if the model behaves as expected ? I would usually go for this one but I feel that it's not enough, i may be wrong.

I tried to do some research on the case, but didn't found much even when reading some Model Risk Management books. If possible could you also please provide some litterature ?

Thank you

  • 1
    $\begingroup$ Maybe I misunderstood your question, but I'd go for 1) find reference implementations in the literature 2) reproduce vanilla prices and 3) - sound development work - pass all unit tests and a good measure of corner cases. HTH? $\endgroup$ Commented Aug 6, 2022 at 22:41
  • $\begingroup$ Alright so there are no other sanity checks other than correctly pricing vanillas, some degenerate cases of bermudan that basically are vanillas and checking some inequalities between bermudan and vanillas. Thank you $\endgroup$
    – Hilbert
    Commented Aug 7, 2022 at 17:32


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Browse other questions tagged or ask your own question.