@article {Wu80,
author = {Wu, Ping and Lin, Hui},
title = {Pricing of Basket Options by Conditioning and Moment Matching},
volume = {28},
number = {2},
pages = {80--87},
year = {2020},
doi = {10.3905/jod.2020.1.103},
publisher = {Institutional Investor Journals Umbrella},
abstract = {The price of basket options can be represented as an exact analytical part and an approximate part by using a conditional variable. The first part is calculated by conditioning on the price process of the underlying asset, and the second part is calculated by a moment-matching approach. In order to calculate the second part, the authors find a new single random variable, which has an analytically known distribution, to approximate the sum of log-normal random variables and to obtain a closed-form pricing formula. Their method can be viewed as a combination of conditioning and moment-matching methods. Numerical studies have demonstrated that their formula is more accurate in handling both homogeneous and heterogeneous lognormal random variable cases.TOPICS: Derivatives, optionsKey Findings{\textbullet} The price of basket options can be represented as an exact analytical part and an approximate part by using a conditional variable. In order to calculate the approximate part, we find a new single random variable, which has an analytically known distribution, to approximate the sum of log-normal random variables and to obtain a closed-form pricing formula.{\textbullet} Numerical studies demonstrate that our formula is more accurate in handling both homogeneous and heterogeneous log-normal random variable cases.},
issn = {1074-1240},
URL = {https://jod.pm-research.com/content/28/2/80},
eprint = {https://jod.pm-research.com/content/28/2/80.full.pdf},
journal = {The Journal of Derivatives}
}