Calculation aspects of the European rebalanced basket option using Monte Carlo methods: Valuation

Abstract

Extra premiums may be charged to a client to guarantee a minimum payout of a contract on a portfolio that gets rebalanced back to fixed proportions on a regular basis. The valuation of this premium can be seen as that of the pricing of a European put option with underlying rebalanced portfolio. This paper finds the most eficient estimators for the value of this path-dependent multi-asset put option using difierent Monte Carlo methods. With the help of a refined method, computational time of the value decreased significantly. Furthermore, variance reduction techniques and Quasi-Monte Carlo methods delivered more accurate and faster converging estimates as well.

Key words: Simulation, stochastic programming, asset pricing, finance,  insurance.