Heterogeneous Basket Options Pricing Using Analytical Approximations

Georges Dionne (), Genevieve Gauthier, Nadia Ouertani and Nabil Tahani
Additional contact information
Genevieve Gauthier: HEC Montreal, Canada
Nadia Ouertani: LEFA, ISCAE Manouba University, Tunisia
Nabil Tahani: York University, Canada

Multinational Finance Journal, 2011, vol. 15, issue 1-2, 47-85

Abstract: This paper proposes the use of analytical approximations to price an heterogeneous basket option combining commodity prices, foreign currencies and zero-coupon bonds. The performance of three moment matching approximations is examined: inverse gamma, Edgeworth expansion around the lognormal and Johnson family distributions. Since there is no closed-form formula for basket options, Monte Carlo simulations are carried out to generate the benchmark values. A simulation experiment on a set of options based on a random choice of parameters is performed. The results show that the Edgeworth-lognormal and Johnson distributions give the most accurate results.

Keywords: Basket Options; Options Pricing; Analytical Approximations; Monte Carlo Simulation (search for similar items in EconPapers)
JEL-codes: C15 C63 F31 G13 (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Heterogeneous Basket Options Pricing Using Analytical Approximations (2006)
Working Paper: Heterogeneous basket options pricing using analytical approximations (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:15:y:2011:i:1-2:p:47-85

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