Closed-form valuations of basket options using a multivariate normal inverse Gaussian model

This paper uses a multivariate normal inverse Gaussian model to develop closed-form pricing formulas for both geometric and arithmetic basket options. For geometric basket options, an exact analytical solution is possible; for arithmetic basket options, the formula is an approximation. The model is based on a jump-driven financial process, which is known empirically to be more realistic than a geometric Brownian motion. By comparing our results to Monte Carlo experiments, we confirm the internal consistency of our formulas. The Greeks can be derived from the closed-form formulas in a straightforward manner. (C) 2008 Elsevier B.V. All rights reserved.