A simple efficient approximation to price basket stock options with volatility smile
| dc.contributor.author | Wu, P. | |
| dc.contributor.author | Elliott, R.J. | |
| dc.date.issued | 2017 | |
| dc.description.abstract | This paper develops a new approach to obtain the price and risk sensitivities of basket options which have a volatility smile. Using this approach, the Black–Scholes model and the Stochastic Volatility Inspired model have been used to obtain an approximate analytical pricing formula for basket options with a volatility smile. It is found that our approximate formula is quite accurate by comparing it with Monte Carlo simulations. It is also proved the option value of our approach is consistent with the option value generated by Levy’s and Gentle’s approaches for typical ranges of volatility. Further, we give a theoretical proof that the option values from Levy’s and Gentle’s works are the upper bound and the lower bound, respectively, for our option value. The calibration procedure and a practical example are provided. The main advantage of our approach is that it provides accurate and easily implemented basket option prices with volatility smile and hedge parameters and avoids the need to use time-consuming numerical procedures such as Monte Carlo simulation. | |
| dc.identifier.citation | Annals of Finance, 2017; 13(1):1-29 | |
| dc.identifier.doi | 10.1007/s10436-017-0292-1 | |
| dc.identifier.issn | 1614-2446 | |
| dc.identifier.issn | 1614-2454 | |
| dc.identifier.uri | https://hdl.handle.net/11541.2/125049 | |
| dc.language.iso | en | |
| dc.publisher | Springer | |
| dc.relation.funding | Jiangsu Key Laboratory of Financial Engineering | |
| dc.rights | Copyright 2017 Springer Access Condition Notes: Postprint available after 1 April 2018 | |
| dc.source.uri | https://doi.org/10.1007/s10436-017-0292-1 | |
| dc.subject | basket options | |
| dc.subject | levy's method | |
| dc.subject | gentle's method | |
| dc.subject | leg-normal approximation | |
| dc.title | A simple efficient approximation to price basket stock options with volatility smile | |
| dc.type | Journal article | |
| pubs.publication-status | Published | |
| ror.fileinfo | 12144429460001831 13144429450001831 9916112210801831 | |
| ror.mmsid | 9916112210801831 |
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