On the closed-form approximation of short-time random strike options
In 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).
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean-Pierre Fouque & George Papanicolaou & Ronnie Sircar & Knut Solna, 2004. "Maturity cycles in implied volatility," Finance and Stochastics, Springer, vol. 8(4), pages 451-477, November.
- Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-86, March.
- Li, Minqiang, 2008. "Closed-Form Approximations for Spread Option Prices and Greeks," MPRA Paper 6994, University Library of Munich, Germany.
- Aanand Venkatramanan & Carol Alexander, 2011. "Closed Form Approximations for Spread Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(5), pages 447-472, January.
- Bjerksund, Petter & Stensland, Gunnar, 2006. "Closed form spread option valuation," Discussion Papers 2006/20, Department of Business and Management Science, Norwegian School of Economics.
- Eric Renault & Nizar Touzi, 1996. "Option Hedging And Implied Volatilities In A Stochastic Volatility Model," Mathematical Finance, Wiley Blackwell, vol. 6(3), pages 279-302.
- Alexey Medvedev & Olivier Scaillet, . "Approximation and Calibration of Short-Term Implied Volatilities under Jump-Diffusion Stochastic Volatility," Swiss Finance Institute Research Paper Series 06-08, Swiss Finance Institute, revised Jan 2006.
- Jean Jacod & Philip Protter, 2010. "Risk-neutral compatibility with option prices," Finance and Stochastics, Springer, vol. 14(2), pages 285-315, April.
When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:1347. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.