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Pricing basket and Asian options under the jump‐diffusion process

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  • Kwangil Bae
  • Jangkoo Kang
  • Hwa‐Sung Kim

Abstract

This study derives approximate valuation formulas for basket options and Asian options under the jump‐diffusion process. To obtain an approximation for options prices under the jump‐diffusion process, we extend the Taylor expansion method developed by Ju N. ( 2002 ) under the diffusion process. We show that the Taylor expansion method, suggested in this study, provides better pricing performance as compared to log‐normal or four‐moment methods. The performance improvement using the Taylor expansion method increases as the time to maturity increases. In addition, our numerical analysis shows that jump effects become significant when the expected jump sizes take large negative values. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 31:830–854, 2011

Suggested Citation

  • Kwangil Bae & Jangkoo Kang & Hwa‐Sung Kim, 2011. "Pricing basket and Asian options under the jump‐diffusion process," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(9), pages 830-854, September.
    • Handle: RePEc:wly:jfutmk:v:31:y:2011:i:9:p:830-854
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    Cited by:

    1. Li, Shaoyu & Huang, Henry H. & Zhang, Teng, 2020. "Generalized affine transform on pricing quanto range accrual note," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Leccadito, Arturo & Paletta, Tommaso & Tunaru, Radu, 2016. "Pricing and hedging basket options with exact moment matching," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 59-69.
    3. Li, Shaoyu & Zhang, Yuanyuan & Zhu, Chunhui, 2021. "A closed-form exact solution for pricing fixed-income variance swaps with affine-jump model," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Wang, Xingchun, 2016. "Pricing vulnerable options with stochastic default barriers," Finance Research Letters, Elsevier, vol. 19(C), pages 305-313.

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