Variance Reduction Techniques for Basket Option

Abstract

This paper prices the basket option by Monte Carlo simulation. With the comparison of the methods used as variance reduction techniques, to find the optimal way for reducing variance for basket option.The methods include antithetic variates, control variates,importance sampling,stratified sampling,moment matching, Latin hypercube sampling and combined methods. Numerical results indicate that an appropriate combination of importance sampling and stratified sampling can obtain the largest variance reductions when estimating the basket option.