TITLE:
A General Closed Form Approximation Pricing Formula for Basket and Multi-Asset Spread Options
AUTHORS:
Tommaso Pellegrino
KEYWORDS:
Basket Options, Spread Options, Derivatives Pricing, Characteristic Function, Fourier Inversion
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.5,
November
30,
2016
ABSTRACT: The aims of this paper are twofold. Firstly, we present an approximating formula for pricing basket and multi-asset spread options, which genuinely extends Caldana and Fusai’s (2013) two-asset spread options formula. Secondly, under the lognormal setting, we show that our formula becomes a Black and Scholes type formula, extending Bjerksund and Stensland’s (2011). Numerical experiments and comparison with Monte Carlo simulations and other methods available in the literature are discussed. The main contribution of this paper is to provide practitioners with a pricing formula, which can be used for pricing basket and multi-asset spread options, even under a non-Gaussian framework.