Quantile hedging for basket derivatives

TL;DR

This paper develops explicit formulas for quantile hedging of basket derivatives within the Black-Scholes model, enabling probability maximization and cost reduction for various traded options.

Contribution

It introduces explicit formulas for quantile hedging functions in basket derivatives, expanding practical hedging strategies in correlated Black-Scholes models.

Findings

Derived explicit formulas for probability maximizing and cost reduction functions.

Applied results to digital, quantos, outperformance, and spread options.

Demonstrated practical applicability for widely traded derivatives.

Abstract

The problem of quantile hedging for basket derivatives in the Black-Scholes model with correlation is considered. Explicit formulas for the probability maximizing function and the cost reduction function are derived. Applicability of the results for the widely traded derivatives as digital, quantos, outperformance and spread options is shown.