Efficient Monte Carlo Pricing of Basket Options
AbstractMontecarlo 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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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 9801001.
Length: 10 pages
Date of creation: 16 Jan 1998
Date of revision:
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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Option pricing; Monte Carlo methods; Variance reduction; Basket options;
Find related papers by JEL classification:
- C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
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