An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options
AbstractFunahashi and Kijima (2013) have proposed an approximation method based on the Wiener-Ito chaos expansion for the pricing of European-style contingent claims. In this paper, we extend the method to the multi-asset case with general local volatility structure for the pricing of exotic basket options such as Asian basket options. Through ample numerical experiments, we show that the accuracy of our approximation remains quite high even for a complex basket option with long maturity and high volatility.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 857.
Date of creation: Apr 2013
Date of revision:
Contact details of provider:
Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
Web page: http://www.kier.kyoto-u.ac.jp/eng/index.html
More information through EDIRC
Wiener-Ito chaos expansion; local volatility; average option; basket option; spread option; Asian basket option;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Ritchken & L. Sankarasubramanian & Anand M. Vijh, 1993. "The Valuation of Path Dependent Contracts on the Average," Management Science, INFORMS, vol. 39(10), pages 1202-1213, October.
- Fabienne Comte & Eric Renault, 1998.
"Long memory in continuous-time stochastic volatility models,"
Wiley Blackwell, vol. 8(4), pages 291-323.
- Comte, F. & Renault, E., 1996. "Long Memory in Continuous Time Stochastic Volatility Models," Papers 96.406, Toulouse - GREMAQ.
- Michael Curran, 1994. "Valuing Asian and Portfolio Options by Conditioning on the Geometric Mean Price," Management Science, INFORMS, vol. 40(12), pages 1705-1711, December.
- Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
- Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September.
- P. Pellizzari, 1998. "Efficient Monte Carlo Pricing of Basket Options," Finance 9801001, EconWPA.
- Jean-Pierre Fouque & Chuan-Hsiang Han, 2003. "Pricing Asian options with stochastic volatility," Quantitative Finance, Taylor & Francis Journals, vol. 3(5), pages 353-362.
- Kemna, A. G. Z. & Vorst, A. C. F., 1990. "A pricing method for options based on average asset values," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 113-129, March.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Milevsky, Moshe Arye & Posner, Steven E., 1998. "Asian Options, the Sum of Lognormals, and the Reciprocal Gamma Distribution," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 409-422, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ryo Okui).
If references are entirely missing, you can add them using this form.