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Wirtschaftswissenschaftlicher Fachbereich - Jahrgang 2008



Essays on Basket Options Hedging and Irreversible Investment Valuation


Xia Su




Basket options are one of well-known newly-generated exotic options. As its name implies, it is an option on a portfolio of several assets. As the underlying basket offers more diversification, basket options gain increasing popularity in world financial markets as a fundamental instrument to manage portfolio risks. Examples thereof are equity index options which are traded on the exchange and usually contingent on at least 15 stocks, as well as currency basket options traded over the counter and written on over two currencies. Obviously, the unique feature of basket options is the basket underlying and a complex correlation structure therefore involved. It provides investors a couple of benefits like high diversification, a lower price against a portfolio of single options and so on, and meanwhile complicates the evaluation of basket options. The inherent challenge in pricing and hedging basket options stems primarily from the analytical intractability of the distribution of the basket. Moreover, the correlation between underlying assets is observed to be volatile over time. Due to the lack of standardized basket options traded in the market, the correlation structure can be only estimated from historical time series or from scarce option data. This further prevents us from exactly pricing basket options, and more importantly, perfectly hedging basket options. more...

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© Universitäts- und Landesbibliothek Bonn | Veröffentlicht: 2008