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.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 857.
Date of creation: Apr 2013
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Wiener-Ito chaos expansion; local volatility; average option; basket option; spread option; Asian basket option;
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