A Simple Generalisation of Kirk’s Approximation for Multi-Asset Spread Options by the Lie-Trotter Operator Splitting Method

DOI: 10.4236/jmf.2014.43016   PDF   HTML   XML   5,246 Downloads   7,091 Views   Citations


In this paper, by means of the Lie-Trotter operator splitting method, we have presented a new unified approach not only to rigorously derive Kirk’s approximation but also to obtain a generalisation for multi-asset spread options in a straightforward manner. The derived price formula for the multi-asset spread option bears a great resemblance to Kirk’s approximation in the two-asset case. More importantly, our approach is able to provide a new perspective on Kirk’s approximation and the generalization; that is, they are simply equivalent to the Lie-Trotter operator splitting approximation to the Black-Scholes equation.

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Lo, C. (2014) A Simple Generalisation of Kirk’s Approximation for Multi-Asset Spread Options by the Lie-Trotter Operator Splitting Method. Journal of Mathematical Finance, 4, 178-187. doi: 10.4236/jmf.2014.43016.

Conflicts of Interest

The authors declare no conflicts of interest.


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