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Pricing of Basket Options Using Polynomial Approximations

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  • Pablo Olivares

Abstract

In this paper we use Bernstein and Chebyshev polynomials to approximate the price of some basket options under a bivariate Black-Scholes model. The method consists in expanding the price of a univariate related contract after conditioning on the remaining underlying assets and calculating the mixed exponential-power moments of a Gaussian distribution that arise as a consequence of such approximation. Our numerical implementation on spread contracts shows the method is as accurate as a standard Monte Carlo approach at considerable lesser computational effort.

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  • Pablo Olivares, 2014. "Pricing of Basket Options Using Polynomial Approximations," Papers 1404.3160, arXiv.org.
    • Handle: RePEc:arx:papers:1404.3160
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    References listed on IDEAS

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    1. Minqiang Li & Jieyun Zhou & Shi-Jie Deng, 2010. "Multi-asset spread option pricing and hedging," Quantitative Finance, Taylor & Francis Journals, vol. 10(3), pages 305-324.
    2. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    3. Pablo Olivares & Alexander Alvarez, 2014. "A Note on the Pricing of Basket Options Using Taylor Approximations," Papers 1404.3229, arXiv.org.
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