Multi-asset Spread Option Pricing and Hedging

Li, Minqiang and Deng, Shijie and Zhou, Jieyun (2008): Multi-asset Spread Option Pricing and Hedging.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: multi-asset spread option, closed-form approximation
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

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