Tid: 24 april 2006 kl 16.15-17.00

Plats : Seminarierummet 3733, Institutionen för matematik, KTH, Lindstedts väg 25, plan 7. Karta!

Föredragshållare: Christian Thulin

Titel: Pricing and Hedging of Basket Options. (Examensarbete)

Sammanfattning: The aim of this thesis is to investigate the pricing and hedging of currency basket options. We start by examining the moment matching method as a way to approximate the price of the basket option. This method is compared to a Monte Carlo simulation.

A basket option could be hedged by trading in the underlying currencies and their options. We use the numerically obtained option Greeks in order to form four different hedging portfolios. These strategies are evaluated using three procedures.

We start by testing the hedging strategies against simulated exchange rates. In this case the volatilities and correlations are assumed to be constant. This allows for the assessment of the hedging strategies under the same assumptions as in the Black & Scholes option model. However, before putting any of the proposed hedging strategies in practice, it is necessary to verify the performance of these hedges under more realistic conditions. We proceed by testing the hedging strategies by historical simulation. Historical data over exchange rates and implied volatilities are used.

Finally we investigate how the relationship between the value of the hedge-portfolios and the basket option is developing over the life of the contract. We consider historical data and examine the correlation and the deviations between the two.

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