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Heterogeneous Basket Options Pricing Using Analytical Approximations

Author

Listed:
  • Georges Dionne
  • Geneviève Gauthier
  • Nadia Ouertani
  • Nabil Tahani
Abstract
This paper proposes the use of analytical approximations to price an heterogeneous basket option combining commodity prices, foreign currencies and zero-coupon bonds. We examine the performance of three moment matching approximations: inverse gamma, Edgeworth expansion around the lognormal and Johnson family distributions. Since there is no closed-form formula for basket options, we carry out Monte Carlo simulations to generate the benchmark values. We perfom a simulation experiment on a whole set of options based on a random choice of parameters. Our results show that the lognormal and Johnson distributions give the most accurate results.

Suggested Citation

  • Georges Dionne & Geneviève Gauthier & Nadia Ouertani & Nabil Tahani, 2006. "Heterogeneous Basket Options Pricing Using Analytical Approximations," Cahiers de recherche 0605, CIRPEE.
    • Handle: RePEc:lvl:lacicr:0605
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    References listed on IDEAS

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    Cited by:

    1. Ng, Andrew C.Y. & Li, Johnny Siu-Hang & Chan, Wai-Sum, 2013. "Pricing options on stocks denominated in different currencies: Theory and illustrations," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 339-354.
    2. Leccadito, Arturo & Paletta, Tommaso & Tunaru, Radu, 2016. "Pricing and hedging basket options with exact moment matching," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 59-69.

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    More about this item

    Keywords

    Basket Options; Options Pricing; Analytical Approximations; Monte Carlo Simulation;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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