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Approximate basket option valuation for a simplified jump process

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  • Dimitris Flamouris
  • Daniel Giamouridis

Abstract

This study proposes the use of a simplified jump process, namely the Bernoulli jump process, to develop approximate basket option valuation formulas. The proposed model is based on a more realistic stochastic process—relative to the standard geometric Brownian motion—without introducing additional intractability. Typical approximations, necessary for the development of the closed form formulas, are validated on the basis of a Monte Carlo experiment. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:819–837, 2007

Suggested Citation

  • Dimitris Flamouris & Daniel Giamouridis, 2007. "Approximate basket option valuation for a simplified jump process," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(9), pages 819-837, September.
    • Handle: RePEc:wly:jfutmk:v:27:y:2007:i:9:p:819-837
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    Cited by:

    1. Ruggero Caldana & Gianluca Fusai & Alessandro Gnoatto & Martino Grasselli, 2016. "General closed-form basket option pricing bounds," Quantitative Finance, Taylor & Francis Journals, vol. 16(4), pages 535-554, April.
    2. Dionne, Georges & Gauthier, Geneviève & Ouertani, Nadia, 2009. "Basket options on heterogeneous underlying assets," Working Papers 09-3, HEC Montreal, Canada Research Chair in Risk Management.
    3. Leccadito, Arturo & Paletta, Tommaso & Tunaru, Radu, 2016. "Pricing and hedging basket options with exact moment matching," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 59-69.

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