An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options　

Hideharu Funahashi () and Masaaki Kijima ()
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Hideharu Funahashi: Mizuho Securities Co. Ltd. and Tokyo Metropolitan University
Masaaki Kijima: Graduate School of Social Sciences, Tokyo Metropolitan University

No 857, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Funahashi and Kijima (2013) have proposed an approximation method based on the Wiener-Ito chaos expansion for the pricing of European-style contingent claims. In this paper, we extend the method to the multi-asset case with general local volatility structure for the pricing of exotic basket options such as Asian basket options. Through ample numerical experiments, we show that the accuracy of our approximation remains quite high even for a complex basket option with long maturity and high volatility.

Keywords: Wiener-Ito chaos expansion; local volatility; average option; basket option; spread option; Asian basket option (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-sea
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