Lower Bound Approximation to Basket Option Values for Local Volatility Jump-Diffusion Models
AbstractIn this paper we derive an easily computed approximation to European basket call prices for a local volatility jump-diffusion model. We apply the asymptotic expansion method to find the approximate value of the lower bound of European basket call prices. If the local volatility function is time independent then there is a closed-form expression for the approximation. Numerical tests show that the suggested approximation is fast and accurate in comparison with the Monte Carlo and other approximation methods in the literature.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1212.3147.
Date of creation: Dec 2012
Date of revision: Oct 2013
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
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