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Lower Bound Approximation To Basket Option Values For Local Volatility Jump-Diffusion Models

Author

Listed:
  • GUOPING XU

    (Citi, Citigroup Centre, London E14 5LB, UK)

  • HARRY ZHENG

    (Department of Mathematics, Imperial College, London SW7 2AZ, UK)

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 (MC) and other approximation methods in the literature.

Suggested Citation

  • Guoping Xu & Harry Zheng, 2014. "Lower Bound Approximation To Basket Option Values For Local Volatility Jump-Diffusion Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-15.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:01:n:s0219024914500071
    DOI: 10.1142/S0219024914500071
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    Cited by:

    1. Ruggero Caldana & Gianluca Fusai & Alessandro Gnoatto & Martino Grasselli, 2016. "General closed-form basket option pricing bounds," Quantitative Finance, Taylor & Francis Journals, vol. 16(4), pages 535-554, April.
    2. Akihiko Takahashi & Toshihiro Yamada, 2015. "On Error Estimates for Asymptotic Expansions with Malliavin Weights: Application to Stochastic Volatility Model," Mathematics of Operations Research, INFORMS, vol. 40(3), pages 513-541, March.

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