An approximation formula for basket option prices under local stochastic volatility with jumps: An application to commodity markets

JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS

卷:292

Article

Shiraya, Kenichiro¹  Takahashi, Akihiko¹ 

[1] Univ Tokyo, Grad Sch Econ, Tokyo 1138654, Japan

关键词: Basket option;    Jump diffusion model;    Stochastic volatility;    Local volatility;    Asymptotic expansion;    Approximation formula;   

DOI  :  10.1016/j.cam.2015.06.027

来源: Elsevier

【 摘 要 】

This paper develops a new approximation formula for pricing basket options in a local-stochastic volatility model with jumps. In particular, the model admits local volatility functions and jump components in not only the underlying asset price processes, but also the volatility processes. To the best of our knowledge, the proposed formula is the first one which achieves an analytical approximation for the basket option prices under this type of the models. Moreover, in numerical experiments, we provide approximate prices for basket options on the WTI futures and Brent futures based on the parameters through calibration to the plain-vanilla option prices, and confirm the validity of our approximation formula. (C) 2015 Elsevier B.V. All rights reserved.

【 授权许可】

Free