Multi-asset Spread Option Pricing and Hedging
We 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.
|Date of creation:||Jan 2008|
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- Minqiang Li, 2008.
"The impact of return nonnormality on exchange options,"
Journal of Futures Markets,
John Wiley & Sons, Ltd., vol. 28(9), pages 845-870, 09.
- Li, Minqiang, 2007. "The Impact of Return Nonnormality on Exchange Options," MPRA Paper 7020, University Library of Munich, Germany.
- Li, Minqiang, 2008. "Closed-Form Approximations for Spread Option Prices and Greeks," MPRA Paper 6994, University Library of Munich, Germany.
- Robert JARROW & Andrew RUDD, 2008. "Approximate Option Valuation For Arbitrary Stochastic Processes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 1, pages 9-31 World Scientific Publishing Co. Pte. Ltd..
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- Paul Berhanu Girma & Albert S. Paulson, 1999. "Risk arbitrage opportunities in petroleum futures spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(8), pages 931-955, December.
- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March. Full references (including those not matched with items on IDEAS)
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