This paper uses a multivariate normal inverse Gaussian model to develop closed-form pricing formulas for both geometric and arithmetic basket options. For geometric basket options, an exact analytical solution is possible; for arithmetic basket options, the formula is an approximation. The model is based on a jump-driven financial process, which is known empirically to be more realistic than a geometric Brownian motion. By comparing our results to Monte Carlo experiments, we confirm the internal consistency of our formulas. The "Greeks" can be derived from the closed-form formulas in a straightforward manner.
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Volume (Year): 44 (2009) Issue (Month): 1 (February) Pages: 95-102 Download reference. The following formats are available: HTML
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