A Note on the Pricing of Basket Options Using Taylor Approximations

2014/04/11 by Olivares, Pablo, Alvarez, Alexander
#91G20 #91G60 #FOS: Economics and business #Pricing of Securities (q-fin.PR)

paper · doi:10.48550/arxiv.1404.3229

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.

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