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

CJ van der Merwe, WJ Conradie


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.

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ISSN 2224-0004 (online); ISSN 0259-191X (print)

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