Multi-Asset Spread Option Pricing and Hedging

Minqiang Li, Shijie Deng, Jieyun Zhou
2007 Social Science Research Network  
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. Numerical analysis shows that while the latter method is more accurate than the former, both methods are extremely fast and accurate. Approximations for important Greeks are also derived in closed-form. Our approximation methods enable the accurate pricing of a bulk volume of spread options on a large number of
more » ... ssets in real time, which offers traders a potential edge in a dynamic market environment.
doi:10.2139/ssrn.1025436 fatcat:b33vedwedzah3gvbidwfk3blgu