Dynamic hedging of multi-objective basket options and its application to portfolio diversification and management

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A basket option is a class of derivatives whose underlying is a weighted sum of different assets or portfolio. In this research, we provide an efficient hedging technique for basket options, where we have shown the following items.(1) We have developed an algorithm to optimally approximate the payoff of basket options using individual options and clarified the theoretical properties.(2) We have demonstrated the efficiency of our proposed optimal hedging technique and compared the optimal hedging strategy with a super-hedging strategy using computer simulations(3) We have applied our methodology for a basket type Merton's model, where a company with default risk consists of multiple assets.