Main category
Economics (Finance)
Abstract
For a European compound call option, the payoff at maturity is given by the maximum of the basket level less the strike, and zero. The option price, given by the discounted expected value of the payoff above, is calculated from a Gauss-Hermite quadrature. The model also provides various hedge ratios, which are approximated using finite differencing but based on parallel shifts to the respective independent variables.
Further reading
https://ia601306.us.archive.org/0/items/averageVol/averageVol.pdf
https://zenodo.org/records/10556835
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