Multi-Asset Spread Option Pricing and Hedging

40 Pages Posted: 31 Oct 2007

See all articles by Minqiang Li

Minqiang Li

Bloomberg LP

Shijie Deng

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Jieyun Zhou

Georgia Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: October 29, 2007

Abstract

We provide two new closed-form approximation methods for pricing spread options on a basket of risky assets: the extended Kirk approximation and the second-order boundary approximation. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Approximations for important Greeks are also derived in closed-form. Our approximation methods enable the accurate pricing of a bulk volume of spread options on a large number of assets in real time, which offers traders a potential edge in a dynamic market environment.

Keywords: Multi-asset spread options, boundary approximation, Kirk approximation

JEL Classification: C02, G13

Suggested Citation

Li, Minqiang and Deng, Shijie and Zhou, Jieyun, Multi-Asset Spread Option Pricing and Hedging (October 29, 2007). Available at SSRN: https://ssrn.com/abstract=1025436 or http://dx.doi.org/10.2139/ssrn.1025436

Minqiang Li (Contact Author)

Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Shijie Deng

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

Jieyun Zhou

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,082
Abstract Views
3,363
rank
20,453
PlumX Metrics