[R-SIG-Finance] American basket options

[Dale Smith]

For baskets of stocks larger than three or so, Monte Carlo methods outperform the best finite difference code. As mentioned below, there are Monte Carlo algorithms for the American case.

Dale Smith, Ph.D.
Vicis Capital, LLC

-----Original Message-----
From: r-sig-finance-bounces at stat.math.ethz.ch [mailto:r-sig-finance-bounces at stat.math.ethz.ch] On Behalf Of Wojciech Slusarski
Sent: Tuesday, October 09, 2007 6:00 AM
To: r-sig-finance at stat.math.ethz.ch
Subject: Re: [R-SIG-Finance] American basket options

There is an algorithm called OLS Monte Carlo, or Longstaff-Schwarz
algorithm for valuation of american/bermudan options using MC method,
though it can be a bit tricky to programm that for a portfolio of 10
securities and be a bit unstable, though worth of trying. If the
dividends are not high, it should not differ much from a european
option priced using Monte Carlo. If dividends are high, then the price
should be slightly higher.

Regards,
Wojciech Ślusarski


2007/10/9, Moshe Olshansky <m_olshansky at yahoo.com>:
> This is an OTC traded option.
>
> For a European option one can estimate the covariance
> matrix and then use Monte Carlo (taking into account
> the dividends for each stock). This is pretty
> straightforward (well, there may be many ways to
> estimate the covariance matrix but let's use the
> simplest one).
>
> Regards,
>
> Moshe.
>
> --- Krishna Kumar <kriskumar at earthlink.net> wrote:
>
> > I am just curious as to if this is being traded in
> > some market ?.
> >
> > This is probably not very helpful but I don't think
> > a European style
> > basket is there in the existing packages. European
> > style baskets are
> > themselves tricky if you want to get the basket
> > smile right etc.
> > American style baskets will be messy.
> >
> > Cheers
> > Krishna
> >
> >
> >
> >
> > Moshe Olshansky wrote:
> > > Hello,
> > >
> > > Is there any R code which allows to calculate the
> > > price of an American basket option (option on a
> > price
> > > of a portfolio)?
> > > If yes, are there any references to how accurate
> > these
> > > calculations are?
> > > If no, can anybody recommend a relatively easy to
> > use
> > > software doing this?
> > >
> > > Are there any non Monte Carlo methods to compute
> > (even
> > > roughly) the price on an American basket put
> > option on
> > > a portfolio of 10 dividend paying stocks with 6
> > months
> > > maturity?
> > >
> > > Thank you in advance,
> > >
> > > Moshe.
> > >
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