Closed-form valuations of basket options using a multivariate normal inverse Gaussian model

Wu, Yang-Che, Liao, Szu-Lang and Shyu, So-De

Insurance: Mathematics and Economics, 2009, vol. 44, issue 1, pages 95-102

Abstract: This paper uses a multivariate normal inverse Gaussian model to develop closed-form pricing formulas for both geometric and arithmetic basket options. For geometric basket options, an exact analytical solution is possible; for arithmetic basket options, the formula is an approximation. The model is based on a jump-driven financial process, which is known empirically to be more realistic than a geometric Brownian motion. By comparing our results to Monte Carlo experiments, we confirm the internal consistency of our formulas. The "Greeks" can be derived from the closed-form formulas in a straightforward manner.

Keywords: Normal; inverse; Gaussian; Basket; option; Esscher; transform; Time-changed; Lévy; process (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:insuma:v:44:y:2009:i:1:p:95-102

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