Heterogeneous Basket Options Pricing Using Analytical Approximations

Multinational Finance Journal, 2011, vol. 15 no. 1/2, pp. 47-85

24 Pages Posted: 27 Feb 2006 Last revised: 22 Jun 2016

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: February 1, 2006

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

JEL Classification: C15, C16, G10, G13

Suggested Citation

Dionne, Georges and Gauthier, Genevieve and Ouertani, Nadia and Tahani, Nabil, Heterogeneous Basket Options Pricing Using Analytical Approximations (February 1, 2006). Multinational Finance Journal, 2011, vol. 15 no. 1/2, pp. 47-85. Available at SSRN: https://ssrn.com/abstract=882855 or http://dx.doi.org/10.2139/ssrn.882855

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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