The Performance of Analytical Approximations for the Computation of Asian Quanto-Basket Option Prices

27 Pages Posted: 7 Jul 2015

See all articles by Jean-Yves Datey

Jean-Yves Datey

Commission scolaire de Montréal (CSDM)

Geneviève Gauthier

HEC Montreal

Jean-Guy Simonato

HEC Montréal

Date Written: July 7, 2015

Abstract

An option contract now commonly encountered is the Asian quanto-basket option. This contract is useful for risk managers willing to participate to the return of an industrial sector with an international exposure without the foreign exchange risk exposition. Although the price of such contracts can be obtained very accurately using Monte Carlo simulation, market participants prefer faster but less accurate analytical approximations. This paper thus examines the precision of three different analytical approximations available to price Asian quanto-basket options. The results of a comprehensive simulation experiment performed on a large test pool of option contracts reveal that the approximations based on the reciprocal gamma and Johnson-type densities are in general the most accurate.

Keywords: analytical approximation; Asian option; basket option; option pricing; quanto option

Suggested Citation

Datey, Jean-Yves and Gauthier, Geneviève and Simonato, Jean-Guy, The Performance of Analytical Approximations for the Computation of Asian Quanto-Basket Option Prices (July 7, 2015). Multinational Finance Journal, Vol. 7, No. 1/2, p. 55-82, 2003, Available at SSRN: https://ssrn.com/abstract=2627559

Jean-Yves Datey (Contact Author)

Commission scolaire de Montréal (CSDM) ( email )

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Montréal, Québec H1X 3B3
Canada

Geneviève Gauthier

HEC Montreal ( email )

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Montreal, Quebec H2X 2L3
Canada

Jean-Guy Simonato

HEC Montréal ( email )

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Service de l'enseignement de la finance
Montreal, Quebec H3T 2A7
Canada
514-340-6807 (Phone)
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