Pricing of Basket Options Using Polynomial Approximations

Pablo Olivares

Papers from arXiv.org

Abstract: In this paper we use Bernstein and Chebyshev polynomials to approximate the price of some basket options under a bivariate Black-Scholes model. The method consists in expanding the price of a univariate related contract after conditioning on the remaining underlying assets and calculating the mixed exponential-power moments of a Gaussian distribution that arise as a consequence of such approximation. Our numerical implementation on spread contracts shows the method is as accurate as a standard Monte Carlo approach at considerable lesser computational effort.

Date: 2014-04
New Economics Papers: this item is included in nep-cmp
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