Efficient Monte Carlo Pricing of Basket Options

Paolo Pellizzari

Finance from University Library of Munich, Germany

Abstract: Montecarlo methods can be used to price derivatives for which closed evaluation formulas are not available or difficult to derive. A drawback of the method can be its high computational cost, especially if applied to basket options, whose payoffs depend on more than one asset. This article presents two kinds of control variates to reduce variance of estimates, based on unconditional and conditional expectations of assets respectively. We apply the previous variance reduction methods to some basket options (Spread, Dual and Portfolio options), achieving in some case remarkable speed and accuracy in price estimation.

Keywords: Option pricing; Monte Carlo methods; Variance reduction; Basket options (search for similar items in EconPapers)
JEL-codes: C8 (search for similar items in EconPapers)
Pages: 10 pages
Date: 1998-01-16
Note: Type of Document - Tex (OzTex for Mac); prepared on Macintosh 6100; to print on PostScript; pages: 10; figures: 1 (included)
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9801001

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