Pricing Arithmetic Average Basket Options
Date Issued
2006
Date
2006
Author(s)
Yu, Hsuan
DOI
en-US
Abstract
Basket option is an option whose payoff depends on the value of a portfolio of underlying assets. Basket option is challenging to price using conventional methods since the weighted sum of lognormal random variables is no longer lognormally distributed. American versions of basket options, i.e., where the owner have the right to exercise early, are particularly challenging to price. We introduce the idea of lognormal approximation and applying Ju’s (1998) method, we extend the idea to price American basket options. We found that the more positively correlated the underlying assets are, the more accurate this method would be. The main contribution of this thesis is that we propose a method to price American basket options efficiently, especially for short maturity options. We test this method for short maturity (4 months and 1 year) and long maturity (3 years) options. Numerical results illustrate the performance of the method.
Subjects
多資產選擇權評價
一籃子選擇權
美式選擇權
蒙地卡羅法
Multi-Asset Option Pricing
Basket Options
American Options
Monte Carlo Method
Type
thesis
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