Basket option hedging method

1. A computer-implemented method for hedging a correlation risk associated with a basket option, the basket option including a plurality of securities, the method comprising:

receiving a selection of a plurality of securities;

defining, by a computer processor, a basket option on the selected plurality of securities, wherein the basket option is exposed to a correlation risk defined by factors comprising a volatility of individual components of the basket option; and

hedging, by the computer processor, against the correlation risk associated with the basket option by combining said basket option with a matching best-of option for the basket option, the combining comprising:

forming, in the computer storage element, the matching best-of option of the basket option based on a correlation factor of the individual components.

2. The method of claim 1 , further comprising purchasing the basket option, wherein the correlation risk results from purchasing the basket option.

3. The method of claim 1 , further comprising displaying on a user interface representations of plots associated with the basket option and best-of option hedge.

4. The method of claim 1 , wherein the best-of option includes all of the selected plurality of securities, and wherein the plurality of securities comprises at least one of foreign exchange securities, equities, commodities, or debt instruments.

5. The method of claim 1 , wherein forming, in the computer storage element, the matching best-of option for the basket option comprises:

calculating, by the computer processor, an expected value of the basket option upon expiration;

calculating, by the computer processor, an effective volatility of the basket option;

calculating, by the computer processor, an effective delta of the basket option; and

calculating, by the computer processor, strikes for each option included in the basket option.

6. The method of claim 5 wherein calculating the effective volatility of the basket option comprises:

calculating, by the computer processor, first and second moments of probability distribution of the expected value of the basket option upon expiration; and

fitting a lognormal distribution to the first and second moments.

7. A system comprising:

a processor;

a memory having instructions stored thereon that when executed by the processor cause a graphical user interface to be displayed on a display device, wherein the graphical user interface displays information from a basket option hedging system that:

defines a basket option on a plurality of securities, wherein the basket option is exposed to a correlation risk defined by factors comprising volatility of individual components of the basket option; and

combines the basket option with a matching best-of option for the basket option to provide a hedge against the correlation risk associated with the basket option, the combining comprising:

forming the matching best-of option for the basket option based on a correlation factor of the individual components of the basket option.

8. The system of claim 7 wherein forming the matching best-of option for the basket option comprises:

calculating an expected value of the basket option upon expiration;

calculating an effective volatility of the basket option;

calculating an effective delta of the basket option; and

calculating strikes for each option included in the basket option.

9. The system of claim 7 , wherein defining the basket option on the basket hedging system includes setting a strike price of the basket option based on a weighted value of the individual components of the basket, and

wherein forming a matching best-of option for the basket option includes forming a best-of option for all of the selected plurality of securities in the basket option.

10. The system of claim 7 , wherein the graphical user interface displays representations of plots associated with the hedge.

11. The system of claim 7 , wherein the plurality of securities comprises at least one of foreign exchange securities, equities, commodities, or debt instruments.

12. The system of claim 7 , wherein the best-of option includes a portion of the selected plurality of securities.

13. A system comprising:

a graphical user interface to display information relating to a basket option hedge on a display device, the graphical user interface comprising:

a first portion to display a basket option on a plurality of securities, the basket option comprising components;

a second portion to display best-of options comprising quantities of individual options set to match quantities of underlying assets in the basket option, wherein the best-of options are formed based on a correlation factor of the basket option components, the best-of option providing a hedge against correlation risk associated with the basket option; and

a third portion to display at least one graphical representation of plots associated with the hedge.

14. The system of claim 13 , wherein the graphical user interface further comprises:

a fourth portion to display effective volatility of the basket option.

15. The system of claim 13 , wherein the graphical user interface further comprises:

a fourth portion to display an expected value of the basket option at expiration.

16. The system of claim 13 , wherein the underlying assets of the basket option comprise at least one of foreign exchange securities, equities, commodities, or debt instruments.

17. The system of claim 13 , wherein the best-of option includes all of the plurality of securities.