Cumulant Expansion and Monthly Sum Derivative

V. M. Belyaev

Papers from arXiv.org

Abstract: Cumulant expansion is used to derive accurate closed-form approximation for Monthly Sum Options in case of constant volatility model. Payoff of Monthly Sum Option is based on sum of $N$ caped (and probably floored) returns. It is noticed, that $1/\sqrt{N}$ can be used as a small parameter in Edgeworth expansion. First two leading terms of this expansion are calculated here. It is shown that the suggest closed-form approximation is in a good agreement with numerical results for typical mode parameters.

Date: 2010-11, Revised 2010-12
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