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A Generalized Bachelier Formula for Pricing Basket and Spread Options


Fringuellotti, Fulvia; Necula, Ciprian (2015). A Generalized Bachelier Formula for Pricing Basket and Spread Options. SSRN Electronic Journal 2698307, University of Zurich.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:4 December 2015
Deposited On:01 Mar 2016 07:44
Last Modified:02 Jun 2017 09:11
Series Name:SSRN Electronic Journal
Number of Pages:19
ISSN:1556-5068
Free access at:Official URL. An embargo period may apply.
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2698307
Other Identification Number:merlin-id:13051

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