A comparison of three analytical approximations for basket option valuation

Three prominent analytical approximations for pricing basket options,by Levy (1992), Ju (2002) and Deelstra et aI. (2004), are tested for performance and accuracy. Sensitivity analysis shows that all three have greater errors in high volatility and long maturity environments, while Deelstra has weaknesses with small correlation and baskets with few stocks. Deelstra and Levy show tendencies to underprice and overprice respectively, while Ju's errors are more consistently around the true price. A mathematical understanding of the three techniques is also developed.

Grantor dc:publisher.institution

Department of Mathematics and Applied Mathematics

Year dc:date.issued

2013

Author dc:creator

• Hagspihl, Christoph

Advisor dc:contributor.advisor

• Floor, Justin

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/18690

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/18690