Multi-Asset Spread Option Pricing and Hedging

Quantitative Finance, Vol. 10, No. 3, pp. 305–324, 2010

Posted: 13 Mar 2010

See all articles by Minqiang Li

Minqiang Li

Bloomberg LP

Jieyun Zhou

Georgia Institute of Technology

Shijie Deng

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

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Date Written: March 11, 2010

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. The latter method generalizes the results in Li et al. [J. Deriv., 2008, 15, 58–80] to spread options on an arbitrary number of assets. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Closed-form approximations for important Greeks are also derived. 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, Second-order boundary approximation, Closed-form approximation

JEL Classification: G12

Suggested Citation

Li, Minqiang and Zhou, Jieyun and Deng, Shijie, Multi-Asset Spread Option Pricing and Hedging (March 11, 2010). Quantitative Finance, Vol. 10, No. 3, pp. 305–324, 2010. Available at SSRN: https://ssrn.com/abstract=1568788

Minqiang Li (Contact Author)

Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Jieyun Zhou

Georgia Institute of Technology ( email )

Atlanta, GA 30332
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

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