Approximate basket options valuation for a jump-diffusion model |
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Authors: | Guoping Xu Harry Zheng |
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Affiliation: | aDepartment of Mathematics, Imperial College, London SW7 2AZ, UK;bDepartment of Mathematics, Imperial College, London SW7 2BZ, UK |
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Abstract: | In this paper we discuss the approximate basket options valuation for a jump-diffusion model. The underlying asset prices follow some correlated diffusion processes with idiosyncratic and systematic jumps. We suggest a new approximate pricing formula which is the weighted sum of Roger and Shi’s lower bound and the conditional second moment adjustments. We show that the approximate value is always within the lower and upper bounds of the option and is very sharp in our numerical tests. |
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Keywords: | IM12 IM20 |
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