Calculation Aspects of the European Rebalanced Basket Option using Monte Carlo Methods: Valuation

  • CJ van der Merwe University of Stellenbosch
  • WJ Conradie University of Stellenbosch

Abstract

Extra premiums can be charged to a client to guarantee a minimum payout of a contract on a portfolio that gets rebalanced on a regular basis back to fixed proportions. The valuation of this premium can be changed to that of the pricing of a European put option with underlying rebalanced portfolio. This article finds the most efficient estimators for the value of this path-dependant multi-asset put option using different Monte Carlo methods. With the help of a refined method, computing time of the value decreased significantly. Furthermore, Variance Reduction Techniques and Quasi-Monte Carlo methods delivered more accurate and faster converging estimates as well.
Published
2012-06-01
Section
Research Articles