On the closed-form approximation of short-time random strike options
AbstractIn this paper we propose a general technique to develop first and second order closed-form approximation formulas for short-time options with random strikes. Our method is based on Malliavin calculus techniques and allows us to obtain simple closed-form approximation formulas depending on the derivative operator. The numerical analysis shows that these formulas are extremely accurate and improve some previous approaches on two-assets and three-assets spread options as Kirk's formula or the decomposition mehod presented in Alòs, Eydeland and Laurence (2011).
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1347.
Date of creation: May 2013
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Web page: http://www.econ.upf.edu/
Spread options; Kirk's formula; Malliavin calculus; derivative operator in the Malliavin calculus sense; Skorohod integral.;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
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