5.119 optimize_basket_forwardprice

Loadable Function: FSl = optimize_basket_forwardprice(weights,

S, riskfree, r, sigma, K, lbound, ubound) , maxiter)

Compute the optimized forward price of basket options according to Beisser et al.

This function is called by the script pricing_basket_options.

Published in: ’Pricing of arithmetic basket options by conditioning’, G. Deelstra et al., Insurance: Mathematics and Economics 34 (2004) Pages 55ff

This function solves equation (33) of aforementioned paper for FSl(K) with bisection method for root finding.

Input and output variables:

• weights: weights of instruments in basket (vector)
• S: instrument spot prices (matrix: scenarios (rows), instruments (columns))
• riskfree: riskfree interest rate (vector)
• r: Weighted correlation coefficients (matrix: scenarios (rows), instruments (columns))
• sigma: instruments volatilities (matrix: scenarios (rows), instruments (columns))
• K: option strike values (vector)
• lbound: lower bound for root finding (suggestion: 0) (scalar)
• ubound: upper bound for root finding (suggestion: 1) (scalar)
• maxiter: maximum iterations in bisection method (set to 100) (scalar)
• limit: optimization limit for root finding (scalar)
• FSl: OUTPUT: Forward price (vector)