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

Author

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  • Hideharu Funahashi

    (Mizuho Securities Co. Ltd. and Tokyo Metropolitan University)

  • Masaaki Kijima

    (Graduate School of Social Sciences, Tokyo Metropolitan University)

Abstract

Funahashi and Kijima (2013) 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, 2013. "An Extension of the Chaos Expansion Approximation for the Pricing of Exotic Basket Options　," KIER Working Papers 857, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:857
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    References listed on IDEAS

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    More about this item

    Keywords

    Wiener-Ito chaos expansion; local volatility; average option; basket option; spread option; Asian basket option;
    All these keywords.

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