Efficient basket Monte Carlo option pricing via a simple analytical approximation

Korn R., Zeytun S.

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS, vol.243, pp.48-59, 2013 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 243
  • Publication Date: 2013
  • Doi Number: 10.1016/j.cam.2012.10.035
  • Journal Name: JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Page Numbers: pp.48-59
  • Keywords: Options based on arithmetic averages, Sum of log-normal distributions, Monte Carlo method, Black-Scholes model, Variance reduction methods, BOUNDS
  • Middle East Technical University Affiliated: Yes

Abstract

We present a new valuation method for basket options that is based on a limiting approximation of the arithmetic mean by the geometric mean. Using this approximation combined with a new analytical pricing formula for an approximating geometric mean-based option as a control variate, excellent performance for Monte Carlo pricing in a control variate setting is obtained. (C) 2012 Elsevier B.V. All rights reserved.