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A Note on the Pricing of Basket Options Using Taylor Approximations

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  • Pablo Olivares
  • Alexander Alvarez

Abstract

In this paper we propose a closed-form approximation for the price of basket options under a multivariate Black-Scholes model, based on Taylor expansions and the calculation of mixed exponential-power moments of a Gaussian distribution. Our numerical results show that a second order expansion provides accurate prices of spread options with low computational costs, even for out-of-the-money contracts.

Suggested Citation

  • Pablo Olivares & Alexander Alvarez, 2014. "A Note on the Pricing of Basket Options Using Taylor Approximations," Papers 1404.3229, arXiv.org.
    • Handle: RePEc:arx:papers:1404.3229
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    References listed on IDEAS

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    1. Pablo Olivares & Matthew Cane, 2014. "Pricing Spread Options under Stochastic Correlation and Jump-Diffusion Models," Papers 1409.1175, arXiv.org.
    2. Minqiang Li & Jieyun Zhou & Shi-Jie Deng, 2010. "Multi-asset spread option pricing and hedging," Quantitative Finance, Taylor & Francis Journals, vol. 10(3), pages 305-324.
    3. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    4. Hull, John C & White, Alan D, 1987. "The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
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    Cited by:

    1. Pablo Olivares, 2014. "Pricing of Basket Options Using Polynomial Approximations," Papers 1404.3160, arXiv.org.

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