Basket Options on Heterogeneous Underlying Assets

30 Pages Posted: 26 May 2009

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Geneviève Gauthier

HEC Montreal - Department of Decision Sciences; HEC Montreal - Department of Management Sciences

Nadia Ouertani

IESEG School of Management; HEC Montréal

Date Written: May 19, 2009

Abstract

Basket options are among the most popular products of the new generation of exotic options. This attraction is explained by the fact that they can efficiently and simultaneously hedge a wide variety of intrinsically different financial risks. They are flexible enough to include all the risks faced by non-financial firms. Unfortunately, the existing literature on basket options considers only homogeneous baskets where all the underlying assets are identical and hedge the same kind of risk. Moreover, the empirical implementation of basket-option models is not yet well developed, particularly when they are composed of heterogeneous underlying assets. This paper focus on the modelization and the parameters estimation of basket options on commodity price with stochastic convenience yield, exchange rate, and domestic and foreign zero-coupon bonds in a stochastic interest rates setting. We empirically compare the performance of the heterogeneous basket option to that of a portfolio of individual options. The results show that the basket strategy is less expensive and more efficient. We apply the maximum-likelihood method to estimate the different parameters of the theoretical basket model as well as the correlations between the variables. Monte Carlo studies are conducted to examine the performance of the maximum-likelihood estimator infinite samples of simulated data. A real data study is presented.

Keywords: basket options, maximum likelihood, hedging performance, options pricing, Monte Carlo simulation

JEL Classification: C15, C16, G1, G13

Suggested Citation

Dionne, Georges and Gauthier, Genevieve and Ouertani, Nadia, Basket Options on Heterogeneous Underlying Assets (May 19, 2009). Available at SSRN: https://ssrn.com/abstract=1408699 or http://dx.doi.org/10.2139/ssrn.1408699

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

Genevieve Gauthier

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada

Nadia Ouertani

IESEG School of Management ( email )

3, rue de la Digue
Office: A321
Puteaux, 92800
France
+ 33 3 20 54 58 92 (Phone)
+ 33 3 20 54 47 86 (Fax)

HEC Montréal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
161
Abstract Views
1,245
rank
187,273
PlumX Metrics