Basket Option Hedging Method
A method and system for hedging a correlation risk associated with a basket option that includes a plurality of securities that includes the step of selecting at least two of the plurality of securities and, in the next step, forming a best-of option for the at least two of the plurality of securities. Finally, the best-of option is combined with the basket option to hedge the correlation risk associated with the basket option.
1 . A method for hedging a correlation risk associated with a basket option, said basket option including a plurality of securities, the method comprising the steps of:
selecting at least two of said plurality of securities;
forming a best-of option for said at least two of said plurality of securities; and combining said best-of option with said basket option.
2 . The method of claim 1 , wherein the step of selecting at least two of said plurality of securities includes the step of:
selecting all of said plurality of securities;
and wherein the step of forming a best-of option for said at least two of said plurality of securities includes the step of:
forming a best-of option for all of said plurality of securities.
3 . The method of claim 1 wherein said risk results from purchasing said basket option and wherein the step of combining said best-of option with said basket option includes the step of:
purchasing said best-of option.
4 . The method of claim 1 wherein said risk results from selling said basket option and wherein the step of combining said best-of option with said basket option comprises the step of:
selling said best-of option.
5 . The method of claim 1 , wherein said securities include foreign exchange securities.
6 . The method of claim 1 , wherein said securities include equities.
7 . The method of claim 1 , wherein said securities comprises commodities.
8 . The method of claim 1 , wherein said securities comprises debt instruments.
9 - 10 . (canceled)
11 . A method for hedging a correlation risk associated with selling a basket option, said basket option including a plurality of securities, the method comprising the step of:
selling a best-of option including at least two of said plurality of securities.
12 . The method of claim 11 , wherein said best-of option includes all of said plurality of securities.
13 . A method for managing risk associated with a portfolio of securities, comprising the steps of:
forming a basket option for said portfolio of securities;
hedging said portfolio of securities with said basket option;
forming a best-of option for said plurality of securities; and
hedging said basket option with best-of option.
14 . The method of claim 13 , wherein said basket option is a basket put option and the step of hedging said portfolio of securities with said basket option includes the step of:
purchasing said basket put option.
15 . The method of claim 13 , wherein said basket option is a basket call option and step of hedging said portfolio of securities with said basket option includes the step of:
purchasing said basket call option.
16 . The method of claim 13 , wherein said step of hedging said basket option with said best-of option includes the step of;
purchasing said best-of option.
17 . The method of claim 13 , wherein said step of hedging said basket option with said best-of option includes the step of;
selling said best-of option.
18 . The method of claim 13 , wherein said portfolio of securities includes foreign exchange securities.
19 . The method of claim 13 , wherein said portfolio of securities includes equities.
20 . The method of claim 13 , wherein said portfolio of securities includes commodities.
21 . The method of claim 13 , wherein said portfolio of securities includes debt instruments.
22 . The method of claim 13 wherein the best-of option is formed by steps comprising:
calculating an expected value of the basket upon expiration;
calculating an effective basket volatility;
calculating an effective delta of the basket option; and
calculating strikes for each option included in the basket.
23 - 27 . (canceled)