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arXiv · 1812.04272

A Numerical Analysis of the Modified Kirk's Formula and Applications to Spread Option Pricing Approximations a numerical analysis of the modified kirk's formula and applications to spread option pricing approximations

Suren Harutyunyan·AdriÀ Masip BorrÀs
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Abstract

In this paper we study recent developments in the approximation of the spread option pricing. As the Kirkś Approximation is extremely flawed in the cases when the correlation is very high, we explore a recent development that allows approximating with simplicity and accuracy the option price. To assess the goodness of fit of the new method, we increase dramatically the number of simulations and scenarios to test the new method and compare it with the original Kirkś formula. The simulations confirmed that the Modified Kirkś Approximation method is extremely accurate, improving Kirkś approach for two-asset spread options.

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Suren Harutyunyan, AdriÀ Masip BorrÀs. 2018-12-11. A Numerical Analysis of the Modified Kirk's Formula and Applications to Spread Option Pricing Approximations a numerical analysis of the modified kirk's formula and applications to spread option pricing approximations. https://arxiv.org/abs/1812.04272

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