Pricing Basket Options

JohnLaw · July 20th, 2006, 12:31 pm

Is there anyone in charge to price options with underlying baskets of homogeneous or heterogeneous indices?Any help will be appreciate a lot!Thanks in advance,P.

DavidF · July 20th, 2006, 2:45 pm

I worked a little bit on this. Can you formulate your question more precisely ?

JohnLaw · July 24th, 2006, 1:32 pm

i am in charge to price exotic option with underlying a basket of indices which is computed as the weighted average. How you behave when you have to price this kind of basket when the index are not necesarrely correlated....how can you simulate the underlying to compute the payoffs ?thanksP.

DavidF · July 24th, 2006, 1:40 pm

One way, if you are able to calibrate a local volatility model for each of the components of the basket, is to have a multi-dimensionnal Monte-Carlo simulation of all of them, with the correlations being estimated for example form historical data.

mrblue1978 · August 10th, 2006, 4:10 pm

There is also moment-matching approximation (ie sum of lognormals is lognormal + calibration of first moments). You can google 'moment-matching basket options' or check this page : http://www.fabiomercurio.it/papers.html

WillK · August 11th, 2006, 5:28 am

QuoteOriginally posted by: DavidFwith the correlations being estimated for example form historical data.Which is the usual way of estimating correlation for pricing exotic option on baskets : is it a pure historical correlation and if yes, which observation window and which frequency ? Or is it some kind of percentile of historical correlation or more complex models ?

jokeoh · August 15th, 2006, 12:08 pm

basket options typically priced as single-factor.use sensible correlations: e.g. for a 2Y ATM call on a basket on NKY, SPX, SX5E, use 2 years worth of data and 180-day weekly sampling.