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Efficient Monte Carlo Pricing of Basket Options

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Author Info

  • P. Pellizzari

    (University of Venice)

Abstract

Montecarlo methods can be used to price derivatives for which closed evaluation formulas are not available or difficult to derive. A drawback of the method can be its high computational cost, especially if applied to basket options, whose payoffs depend on more than one asset. This article presents two kinds of control variates to reduce variance of estimates, based on unconditional and conditional expectations of assets respectively. We apply the previous variance reduction methods to some basket options (Spread, Dual and Portfolio options), achieving in some case remarkable speed and accuracy in price estimation.

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File URL: http://128.118.178.162/eps/fin/papers/9801/9801001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9801001.

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Length: 10 pages
Date of creation: 16 Jan 1998
Date of revision:
Handle: RePEc:wpa:wuwpfi:9801001

Note: Type of Document - Tex (OzTex for Mac); prepared on Macintosh 6100; to print on PostScript; pages: 10; figures: 1 (included)
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Web page: http://128.118.178.162

Related research

Keywords: Option pricing; Monte Carlo methods; Variance reduction; Basket options;

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References

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  1. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  2. 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.
  3. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  4. 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.
  5. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
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Cited by:
  1. Hideharu Funahashi & Masaaki Kijima, 2013. "An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options," KIER Working Papers 857, Kyoto University, Institute of Economic Research.
  2. Tommaso Paletta & Arturo Leccadito & Radu Tunaru, 2013. "Pricing and Hedging Basket Options with Exact Moment Matching," Papers 1312.4443, arXiv.org.
  3. Giannopoulos, Kostas, 2008. "Nonparametric, conditional pricing of higher order multivariate contingent claims," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1907-1915, September.
  4. Piergiacomo Sabino, 2009. "Efficient quasi-Monte simulations for pricing high-dimensional path-dependent options," Decisions in Economics and Finance, Springer, vol. 32(1), pages 49-65, May.
  5. Xia Su, 2006. "Hedging Basket Options by Using a Subset of Underlying Assets," Bonn Econ Discussion Papers bgse14_2006, University of Bonn, Germany.

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