Pricing Basket Options under Local Stochastic Volatility with Jumps
This paper develops a new approximation formula for pricing basket options in a local-stochastic volatility model with jumps. In particular, the model admits local volatility functions and jump components in not only the underlying asset price processes, but also the volatility processes. To the best of our knowledge, the proposed formula is the first one which achieves an analytical approximation for the basket option prices under this type of the models. Moreover, some numerical experiments confirm the validity of the method.
|Date of creation:||Dec 2013|
|Date of revision:||May 2014|
|Contact details of provider:|| Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033|
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- Guoping Xu & Harry Zheng, 2010. "Basket Options Valuation for a Local Volatility Jump-Diffusion Model with the Asymptotic Expansion Method," Papers 1003.1848, arXiv.org.
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- Masaaki Fujii & Akihiko Takahashi, 2012. "ANALYTICAL APPROXIMATION FOR NON-LINEAR FBSDEs WITH PERTURBATION SCHEME," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1250034-1-1.
- Masaaki Fujii & Seisho Sato & Akihiko Takahashi, 2012. "An FBSDE Approach to American Option Pricing with an Interacting Particle Method," Papers 1211.5867, arXiv.org.
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