A comparison of three analytical approximations for basket option valuation

Master Thesis

2013

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http://hdl.handle.net/11427/18690
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thesis_sci_2013_hagspihl_christoph.pdf (7.57 MB)
Authors
Hagspihl, Christoph
Supervisors
Floor, Justin
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University of Cape Town

Department
Department of Mathematics and Applied Mathematics
Faculty
Faculty of Science
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Abstract
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.
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Keywords
Financial Mathematics

Reference:

Hagspihl, C. 2013. A comparison of three analytical approximations for basket option valuation. University of Cape Town.

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