A Note on the Pricing of Basket Options Using Taylor Approximations
AbstractIn this paper we propose a closed-form approximation for the price of basket options under a multivariate Black-Scholes model, based on Taylor expansions and the calculation of mixed exponential-power moments of a Gaussian distribution. Our numerical results show that a second order expansion provides accurate prices of spread options with low computational costs, even for out-of-the-money contracts.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1404.3229.
Date of creation: Apr 2014
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
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- Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, American Finance Association, vol. 42(2), pages 281-300, June.
- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, American Finance Association, vol. 33(1), pages 177-86, March.
- Li, Minqiang & Deng, Shijie & Zhou, Jieyun, 2008.
"Multi-asset Spread Option Pricing and Hedging,"
8259, University Library of Munich, Germany.
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