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Pricing Basket Options by Polynomial Approximations

Author

Listed:
  • Pablo Olivares
  • Alexander Alvarez

Abstract

We propose a closed‐form approximation for the price of basket options under a multivariate Black‐Scholes model. The method is based on Taylor and Chebyshev expansions and involves mixed exponential‐power moments of a Gaussian distribution. Our numerical results show that both approaches are comparable in accuracy to a standard Monte Carlo method, with a lesser computational effort.

Suggested Citation

  • Pablo Olivares & Alexander Alvarez, 2016. "Pricing Basket Options by Polynomial Approximations," Journal of Applied Mathematics, John Wiley & Sons, vol. 2016(1).
    • Handle: RePEc:wly:jnljam:v:2016:y:2016:i:1:n:9747394
    DOI: 10.1155/2016/9747394
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    References listed on IDEAS

    as
    1. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    2. Li, Minqiang, 2008. "Closed-Form Approximations for Spread Option Prices and Greeks," MPRA Paper 6994, University Library of Munich, Germany.
    3. Aanand Venkatramanan & Carol Alexander, 2011. "Closed Form Approximations for Spread Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(5), pages 447-472, January.
    4. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    5. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
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