Heterogeneous Basket Options Pricing Using Analytical Approximations

39 Pages Posted: 25 Jun 2015

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

Nabil Tahani

York University - Atkinson School of Administrative Studies

Multiple version iconThere are 2 versions of this paper

Date Written: June 25, 2015

Abstract

This paper proposes the use of analytical approximations to price an heterogeneous basket option combining commodity prices, foreign currencies and zero-coupon bonds. The performance of three moment matching approximations is examined: inverse gamma, Edgeworth expansion around the lognormal and Johnson family distributions. Since there is no closed-form formula for basket options, Monte Carlo simulations are carried out to generate the benchmark values. A simulation experiment on a set of options based on a random choice of parameters is performed. The results show that the Edgeworth-lognormal and Johnson distributions give the most accurate results.

Keywords: Basket Options; Options Pricing; Analytical Approximations; Monte Carlo Simulation

JEL Classification: C15, C63, F31, G13

Suggested Citation

Dionne, Georges and Gauthier, Genevieve and Ouertani, Nadia and Tahani, Nabil, Heterogeneous Basket Options Pricing Using Analytical Approximations (June 25, 2015). Multinational Finance Journal, Vol. 15, No. 1/2, p. 47-85, 2011. Available at SSRN: https://ssrn.com/abstract=2622950

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

Nabil Tahani

York University - Atkinson School of Administrative Studies ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://www.yorku.ca/ntahani

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