Basket Option Hedging Method

Abstract

A method and system for hedging a correlation risk associated with a basket option that includes a plurality of securities that includes the step of selecting at least two of the plurality of securities and, in the next step, forming a best-of option for the at least two of the plurality of securities. Finally, the best-of option is combined with the basket option to hedge the correlation risk associated with the basket option.

1 . A method for hedging a correlation risk associated with a basket option, said basket option including a plurality of securities, the method comprising the steps of:
 selecting at least two of said plurality of securities;   forming a best-of option for said at least two of said plurality of securities; and combining said best-of option with said basket option.   
     
     
         2 . The method of  claim 1 , wherein the step of selecting at least two of said plurality of securities includes the step of:
 selecting all of said plurality of securities;   and wherein the step of forming a best-of option for said at least two of said plurality of securities includes the step of:   forming a best-of option for all of said plurality of securities.   
     
     
         3 . The method of  claim 1  wherein said risk results from purchasing said basket option and wherein the step of combining said best-of option with said basket option includes the step of:
 purchasing said best-of option. 
 
     
     
         4 . The method of  claim 1  wherein said risk results from selling said basket option and wherein the step of combining said best-of option with said basket option comprises the step of:
 selling said best-of option. 
 
     
     
         5 . The method of  claim 1 , wherein said securities include foreign exchange securities. 
     
     
         6 . The method of  claim 1 , wherein said securities include equities. 
     
     
         7 . The method of  claim 1 , wherein said securities comprises commodities. 
     
     
         8 . The method of  claim 1 , wherein said securities comprises debt instruments. 
     
     
         9 - 10 . (canceled) 
     
     
         11 . A method for hedging a correlation risk associated with selling a basket option, said basket option including a plurality of securities, the method comprising the step of:
 selling a best-of option including at least two of said plurality of securities.   
     
     
         12 . The method of  claim 11 , wherein said best-of option includes all of said plurality of securities. 
     
     
         13 . A method for managing risk associated with a portfolio of securities, comprising the steps of:
 forming a basket option for said portfolio of securities;   hedging said portfolio of securities with said basket option;   forming a best-of option for said plurality of securities; and   hedging said basket option with best-of option.   
     
     
         14 . The method of  claim 13 , wherein said basket option is a basket put option and the step of hedging said portfolio of securities with said basket option includes the step of:
 purchasing said basket put option.   
     
     
         15 . The method of  claim 13 , wherein said basket option is a basket call option and step of hedging said portfolio of securities with said basket option includes the step of:
 purchasing said basket call option.   
     
     
         16 . The method of  claim 13 , wherein said step of hedging said basket option with said best-of option includes the step of;
 purchasing said best-of option.   
     
     
         17 . The method of  claim 13 , wherein said step of hedging said basket option with said best-of option includes the step of;
 selling said best-of option.   
     
     
         18 . The method of  claim 13 , wherein said portfolio of securities includes foreign exchange securities. 
     
     
         19 . The method of  claim 13 , wherein said portfolio of securities includes equities. 
     
     
         20 . The method of  claim 13 , wherein said portfolio of securities includes commodities. 
     
     
         21 . The method of  claim 13 , wherein said portfolio of securities includes debt instruments. 
     
     
         22 . The method of  claim 13  wherein the best-of option is formed by steps comprising:
 calculating an expected value of the basket upon expiration; 
 calculating an effective basket volatility; 
 calculating an effective delta of the basket option; and 
 calculating strikes for each option included in the basket. 
 
     
     
         23 - 27 . (canceled)