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An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options

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  • Hideharu Funahashi
  • Masaaki Kijima

Abstract

Funahashi and Kijima (in press, A chaos expansion approach for the pricing of contingent claims, Journal of Computational Finance ) have proposed an approximation method based on the Wiener--Ito chaos expansion for the pricing of European-style contingent claims. In this paper, we extend the method to the multi-asset case with general local volatility structure for the pricing of exotic basket options such as Asian basket options. Through ample numerical experiments, we show that the accuracy of our approximation remains quite high even for a complex basket option with long maturity and high volatility.

Suggested Citation

  • Hideharu Funahashi & Masaaki Kijima, 2014. "An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(2), pages 109-139, April.
    • Handle: RePEc:taf:apmtfi:v:21:y:2014:i:2:p:109-139
    DOI: 10.1080/1350486X.2013.812855
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    Cited by:

    1. Hideharu Funahashi, 2017. "Pricing derivatives with fractional volatility," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-28, March.
    2. Hideharu Funahashi & Masaaki Kijima, 2017. "A unified approach for the pricing of options relating to averages," Review of Derivatives Research, Springer, vol. 20(3), pages 203-229, October.

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