A Generalized Bachelier Formula for Pricing Basket and Spread Options

19 Pages Posted: 4 Dec 2015

See all articles by Fulvia Fringuellotti

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

Ciprian Necula

University of Zurich - Department of Banking and Finance; Bucharest University of Economic Studies, Department of Money and Banking

Date Written: November 16, 2015

Abstract

In this paper we propose a closed-form pricing formula for European basket and spread options. Our approach is based on approximating the risk-neutral probability density function of the terminal value of the basket using a Gauss-Hermite series expansion around the Gaussian density. The new method is quite general as it can be applied for a basket with a large number of assets and for all dynamics where the joint characteristic function of log-returns is known in closed form. We provide a simulation study to show the accuracy and the speed of our methodology.

Keywords: Basket options, Spread options, Option pricing, Gauss-Hermite series expansion

JEL Classification: C63, G13

Suggested Citation

Fringuellotti, Fulvia and Necula, Ciprian, A Generalized Bachelier Formula for Pricing Basket and Spread Options (November 16, 2015). Available at SSRN: https://ssrn.com/abstract=2698307 or http://dx.doi.org/10.2139/ssrn.2698307

Fulvia Fringuellotti

Federal Reserve Banks - Federal Reserve Bank of New York

33 Liberty Street
New York, NY 10045
United States

Ciprian Necula (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Z├╝rich, 8032
Switzerland

Bucharest University of Economic Studies, Department of Money and Banking ( email )

6, Romana Square, District 1
Bucharest, 010374
Romania

HOME PAGE: http://www.dofin.ase.ro/cipnec

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