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arXiv · 1404.3160

Pricing of Basket Options Using Polynomial Approximations

Pablo Olivares
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Abstract

In this paper we use Bernstein and Chebyshev polynomials to approximate the price of some basket options under a bivariate Black-Scholes model. The method consists in expanding the price of a univariate related contract after conditioning on the remaining underlying assets and calculating the mixed exponential-power moments of a Gaussian distribution that arise as a consequence of such approximation. Our numerical implementation on spread contracts shows the method is as accurate as a standard Monte Carlo approach at considerable lesser computational effort.

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Pablo Olivares. 2014-04-11. Pricing of Basket Options Using Polynomial Approximations. https://arxiv.org/abs/1404.3160

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