On coordinate transformation and grid stretching for sparse grid pricing of basket options

✍ Scribed by C.C.W. Leentvaar; C.W. Oosterlee

• Publisher: Elsevier Science
• Year: 2008
• Tongue: English
• Weight: 665 KB
• Volume: 222
• Category: Article
• ISSN: 0377-0427
• DOI: 10.1016/j.cam.2007.10.015

✦ Synopsis

We evaluate two coordinate transformation techniques in combination with grid stretching for pricing basket options in a sparse grid setting. The sparse grid technique is a basic technique for solving a high-dimensional partial differential equation. By creating a small hypercube sub-grid in the 'composite' sparse grid we can also determine hedge parameters accurately. We evaluate these techniques for multi-asset examples with up to five underlying assets in the basket.