Heterogeneous basket options pricing using analytical approximations

Georges Dionne (), Geneviève Gauthier (), Nadia Ouertani () and Nabil Tahani ()
Additional contact information
Geneviève Gauthier: HEC Montreal, Department of Decision Sciences
Nadia Ouertani: HEC Montreal, Canada Research Chair in Risk Management
Nabil Tahani: HEC Montreal, Canada Research Chair in Risk Management

No 06-1, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

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 perform 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)
Pages: 24 pages
Date: 2006-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.risksresearch.com/_files/ugd/a6eed3_5f ... 9c55f8e0b631fd9f.pdf Full text (application/pdf)

Related works:
Journal Article: Heterogeneous Basket Options Pricing Using Analytical Approximations (2011)
Working Paper: Heterogeneous Basket Options Pricing Using Analytical Approximations (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2006_001

Access Statistics for this paper

More papers in Working Papers from HEC Montreal, Canada Research Chair in Risk Management Contact information at EDIRC.
Bibliographic data for series maintained by Claire Boisvert ().