Multi-asset Spread Option Pricing and Hedging
AbstractWe provide two new closed-form approximation methods for pricing spread options on a basket of risky assets: the extended Kirk approximation and the second-order boundary approximation. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Approximations for important Greeks are also derived in closed form. Our approximation methods enable the accurate pricing of a bulk volume of spread options on a large number of assets in real time, which offers traders a potential edge in a dynamic market environment.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 8259.
Date of creation: Jan 2008
Date of revision:
multi-asset spread option; closed-form approximation;
Other versions of this item:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Li, Minqiang & Mercurio, Fabio, 2013. "Closed-Form Approximation of Timer Option Prices under General Stochastic Volatility Models," MPRA Paper 47465, University Library of Munich, Germany.
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