In this second, more advanced example, we will illustrate the implementation of the pricing of an equity basket option, with the payoff being the largest between two asset values at maturity. The details of the approach are shown in the following Bento Box template:
Our aim is to compute the option premium as before.
The details of the contract are in Box 1, particularly the payoff function is as follows:
Note that this being a basket option with two assets, we will now need two GBM processes to describe the evolution of the underlying. This is reflected in STEP 3 that has been updated in the algorithm in box 4. We can then use the same MC numerical method to compute the expectation of the payoffs.
The C++ implementation of this algorithm can be found in code snippet 4. There are only two slight differences with Code 1: first, regarding the input parameters (STEP 1) and second regarding the calculation of...