LOWER BOUND APPROXIMATION TO BASKET OPTION VALUES FOR LOCAL VOLATILITY JUMP-DIFFUSION MODELS

DOI10.1142/S0219024914500071MaRDI QIDQ5411991zbMATH OpenOpenAlexFDO

Authors Guoping Xu, Harry Zheng

Publication date 25 April 2014

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1212.3147

zbMATH Keywords

basket options valuationlocal volatility jump-diffusion modellower bound approximationsecond-order asymptotic expansion

Mathematics Subject Classification ID

Asymptotic expansions of solutions to PDEs (35C20) PDEs with randomness, stochastic partial differential equations (35R60) Applications of stochastic analysis (to PDEs, etc.) (60H30) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: In this paper we derive an easily computed approximation to European basket call prices for a local volatility jump-diffusion model. We apply the asymptotic expansion method to find the approximate value of the lower bound of European basket call prices. If the local volatility function is time independent then there is a closed-form expression for the approximation. Numerical tests show that the suggested approximation is fast and accurate in comparison with the Monte Carlo and other approximation methods in the literature.

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Cites work

• Approximate basket options valuation for a jump-diffusion model
• Basket options valuation for a local volatility jump-diffusion model with the asymptotic expansion method
• General Lower Bounds for Arithmetic Asian Option Prices
• Pricing of arithmetic basket options by conditioning.
• The asymptotic expansion approach to the valuation of interest rate contingent claims
• The value of an Asian option
• Transform Analysis and Asset Pricing for Affine Jump-diffusions
• Valuing Asian and Portfolio Options by Conditioning on the Geometric Mean Price

Cited in

(10)

• The pricing of basket options: a weak convergence approach
• On error estimates for asymptotic expansions with Malliavin weights: application to stochastic volatility model
• Asymptotic expansion approach in finance
• Basket option pricing and implied correlation in a one-factor Lévy model
• An approximation formula for basket option prices under local stochastic volatility with jumps: an application to commodity markets
• General closed-form basket option pricing bounds
• An approximation method for pricing continuous barrier options under multi-asset local stochastic volatility models
• Lower bound approximation of nonlinear basket option with jump-diffusion
• Approximate basket options valuation for a jump-diffusion model
• Basket options valuation for a local volatility jump-diffusion model with the asymptotic expansion method

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