Pricing of Basket Options Using Polynomial Approximations
AbstractIn this paper we use Bernstein and Chebyshev polynomials to approximate the price of some basket options under a bivariate Black-Scholes model. The method consists in expanding the price of a univariate related contract after conditioning on the remaining underlying assets and calculating the mixed exponential-power moments of a Gaussian distribution that arise as a consequence of such approximation. Our numerical implementation on spread contracts shows the method is as accurate as a standard Monte Carlo approach at considerable lesser computational effort.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1404.3160.
Date of creation: Apr 2014
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- Fang, Fang & Oosterlee, Kees, 2008.
"A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions,"
9319, University Library of Munich, Germany.
- Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 7700, University Library of Munich, Germany.
- Minqiang Li & Jieyun Zhou & Shi-Jie Deng, 2010.
"Multi-asset spread option pricing and hedging,"
Quantitative Finance, Taylor & Francis Journals,
Taylor & Francis Journals, vol. 10(3), pages 305-324.
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