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arXiv · 1212.3147

Lower Bound Approximation to Basket Option Values for Local Volatility Jump-Diffusion Models

Guoping Xu·Harry Zheng
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Abstract

In this paper we derive an easily computed approximation to European basket call prices for a local volatility jump-diffusion model. We apply the asymptotic expansion method to find the approximate value of the lower bound of European basket call prices. If the local volatility function is time independent then there is a closed-form expression for the approximation. Numerical tests show that the suggested approximation is fast and accurate in comparison with the Monte Carlo and other approximation methods in the literature.

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Guoping Xu, Harry Zheng. 2013-10-12. Lower Bound Approximation to Basket Option Values for Local Volatility Jump-Diffusion Models. https://arxiv.org/abs/1212.3147

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