PT  - JOURNAL ARTICLE
AU  - Feifan Wu
AU  - Xundi Diao
AU  - Chongfeng Wu
TI  - A General Accurate Approximation for Pricing and Hedging Basket Options with Exact Moment Matching
AID  - 10.3905/jod.2019.1.072
DP  - 2019 Feb 08
TA  - The Journal of Derivatives
PG  - jod.2019.1.072
4099  - https://pm-research.com/content/early/2019/02/07/jod.2019.1.072.short
4100  - https://pm-research.com/content/early/2019/02/07/jod.2019.1.072.full
AB  - This paper provides a new methodology for pricing and hedging basket options. The authors approximate the basket by using the shifted log-normal distribution with the polynomial expansion, which can match exactly any required m moments of the basket, to give quasi-analytical formulas for the prices and hedging parameters of basket options. Numerical simulations show that the methodology provides superior results for basket option prices and hedging parameters. This methodology works well not only for regular baskets but also for negative-weight baskets and negative-value baskets. Compared with the best available methods, the authors’ methodology appears to perform better.