Overview

There has been enormous growth in the use of various forms of basket options since their initial introduction. This tutorial examines some of the key variants and shows how these have become attractive to investors, particularly in the retail equity area. Although the products are often easy to understand in terms of payoffs, they raise particular issues around structuring, pricing, and hedging, especially as regards the role of correlation. This tutorial outlines the issues and the key responses to the challenges.

Objective

On completion of this tutorial, you will be able to:

- Describe some of the many variants of basket options, and identify their attractiveness in different situations
- Explain how complex options have been embedded in structured notes
- Identify the key pricing challenges faced by structurers and traders of multi-asset options, and in particular explain the role of correlation
- Outline the differing and evolving algorithmic and analytic pricing approaches that are used to price basket options

Content

Topic 1: Diversity of Instruments
Topic 2: Creating Structured Notes
Topic 3: Pricing Approaches
Topic 4: Pricing Considerations