Pricing of European Basket Call Option under Exponential Ornstein-Uhlenbeck Process
Jingwei Liu, Jiwen Luo, Xing Chen
TL;DR
This paper derives a closed-form formula for pricing European basket call options where asset prices follow exponential Ornstein-Uhlenbeck processes, and demonstrates a numerical approximation method with simulation results.
Contribution
It introduces a closed-form pricing formula for basket options under exponential Ornstein-Uhlenbeck processes and applies a Milstein method for numerical approximation.
Findings
Closed-form pricing formula derived for basket options
Numerical approximation using Milstein method demonstrated
Simulation example with 3 assets provided
Abstract
Pricing of European basket call option with n-assets and a bond is discussed in this paper, where all prices of n-assets and the bond are driven by Exponential Ornstein-Uhlenbeck processes. The close-form of European basket option pricing formula is derived. Utilizing with 1-order differential approximate numerical solution of stochastic differential equation (Milstein method), a simulation example of European basket option pricing with 3 assets is also given.
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Taxonomy
TopicsStochastic processes and financial applications · Financial Risk and Volatility Modeling · Complex Systems and Time Series Analysis