A Note on the Pricing of Basket Options Using Taylor Approximations

Pablo Olivares; Alexander Alvarez

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arXiv · 1404.3229

A Note on the Pricing of Basket Options Using Taylor Approximations

Pablo Olivares·Alexander Alvarez

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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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Pablo Olivares, Alexander Alvarez. 2014-04-11. A Note on the Pricing of Basket Options Using Taylor Approximations. https://arxiv.org/abs/1404.3229

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