Completed · November 2025
Correlated Equities Basket Option Pricing & Hedging Model
A seller-side pricing and hedging study for a correlated NVDA–MSFT basket option, combining Monte Carlo fair value with static replication and tail-risk analysis.
DerivativesGBMStatic ReplicationVaRHedging
What should a dealer charge for a nonlinear basket payoff once replication basis risk and loss-tail exposure are made explicit?
APPROACH
01
Estimated volatilities and correlation, then simulated 10,000 joint GBM price paths.
02
Calculated Monte Carlo fair value and designed a four-option static replication strategy.
03
Measured hedge cost, basis risk, seller P&L distribution, and 5% worst-case loss.
04
Applied a risk premium to a representative $10 million client position.