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Valuation and applications of compound basket options
Author(s) -
Bae Kwangil
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21996
Subject(s) - collateralized debt obligation , equity (law) , economics , portfolio , financial economics , valuation (finance) , leverage (statistics) , capital structure , valuation of options , debt , econometrics , actuarial science , finance , collateral , mathematics , statistics , political science , law
This study investigates compound basket options, which are options on portfolios of options. Although they may be new to financial markets, they are available as equity basket options, equity spread options, stocks of holding companies, and collateralized debt obligations. Using moments of portfolio values, we provide formulas for pricing compound basket options. According to numerical analysis, a lower bound and a weighted average of bounds yield relatively small errors. Additionally, ignoring the compound feature increases the pricing error of equity basket options because the feature captures the capital structure and leverage effect of stock prices.