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Pricing of Basket Options Using Polynomial Approximations

  • Pablo Olivares
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    In this paper we use Bernstein and Chebyshev polynomials to approximate the price of some basket options under a bivariate Black-Scholes model. The method consists in expanding the price of a univariate related contract after conditioning on the remaining underlying assets and calculating the mixed exponential-power moments of a Gaussian distribution that arise as a consequence of such approximation. Our numerical implementation on spread contracts shows the method is as accurate as a standard Monte Carlo approach at considerable lesser computational effort.

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    File URL: http://arxiv.org/pdf/1404.3160
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    Paper provided by arXiv.org in its series Papers with number 1404.3160.

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    Date of creation: Apr 2014
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    Handle: RePEc:arx:papers:1404.3160
    Contact details of provider: Web page: http://arxiv.org/

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    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 & Deng, Shijie & Zhou, Jieyun, 2008. "Multi-asset Spread Option Pricing and Hedging," MPRA Paper 8259, University Library of Munich, Germany.
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