Approximate basket option valuation for a simplified jump process

✍ Scribed by Dimitris Flamouris; Daniel Giamouridis

• Book ID: 102214798
• Publisher: John Wiley and Sons
• Year: 2007
• Tongue: English
• Weight: 176 KB
• Volume: 27
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20269

✦ Synopsis

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