Heterogeneous Basket Options Pricing Using Analytical Approximations

Georges Dionne (), Geneviève Gauthier, Nadia Ouertani and Nabil Tahani

Cahiers de recherche from CIRPEE

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.

Keywords: Basket Options; Options Pricing; Analytical Approximations; Monte Carlo Simulation (search for similar items in EconPapers)
JEL-codes: C15 C16 G10 G13 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Heterogeneous Basket Options Pricing Using Analytical Approximations (2011)
Working Paper: Heterogeneous basket options pricing using analytical approximations (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0605

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