Author(s)

Tommaso Pellegrino

Quantitative Strategist in the Strats Team, Mercuria UK LLP, London, UK.

The aims of this paper are twofold. Firstly, we present an approximating formula for pricing basket and multi-asset spread options, which genuinely extends Caldana and Fusai’s (2013) two-asset spread options formula. Secondly, under the lognormal setting, we show that our formula becomes a Black and Scholes type formula, extending Bjerksund and Stensland’s (2011). Numerical experiments and comparison with Monte Carlo simulations and other methods available in the literature are discussed. The main contribution of this paper is to provide practitioners with a pricing formula, which can be used for pricing basket and multi-asset spread options, even under a non-Gaussian framework.

Basket Options, Spread Options, Derivatives Pricing, Characteristic Function, Fourier Inversion

Pellegrino, T. (2016) A General Closed Form Approximation Pricing Formula for Basket and Multi-Asset Spread Options. Journal of Mathematical Finance, 6, 944-974. doi: 10.4236/jmf.2016.65063.