Multi-asset spread option pricing and hedging

Minqiang Li, Jieyun Zhou and Shi-Jie Deng

Quantitative Finance, 2010, vol. 10, issue 3, 305-324

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. The latter method generalizes the results in Li et al. [J. Deriv., 2008, 15, 58-80] to spread options on an arbitrary number of assets. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Closed-form approximations for important Greeks are also derived. 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.

Keywords: Multi-asset spread options; Second-order boundary approximation; Closed-form approximation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (19)

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Working Paper: Multi-asset Spread Option Pricing and Hedging (2008)
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DOI: 10.1080/14697680802626323

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