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Title: Heterogeneous Basket Options Pricing Using Analytical Approximations
Authors: Dionne, Georges
Gauthier, Geneviève
Ouertani, Nadia
Tahani, Nabil
Keywords: Basket Options
Options Pricing
Analytical Approximations
Monte Carlo Simulation
Issue Date: 2006-02
Series/Report no.: Cahiers du CIRPÉE;06-05
Abstract: This paper proposes the use of analytical approximations to price an heterogeneous basket option combining commodity prices, foreign currencies and zero-coupon bonds. We examine the performance of three moment matching approximations: inverse gamma, Edgeworth expansion around the lognormal and Johnson family distributions. Since there is no closed-form formula for basket options, we carry out Monte Carlo simulations to generate the benchmark values. We perform a simulation experiment on a whole set of options based on a random choice of parameters. Our results show that the lognormal and Johnson distributions give the most accurate results.
Appears in Collections:Cahiers de recherche du CIRPÉE

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