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Accurate closed-form approximation for pricing Asian and basket options

✍ Scribed by Jinke Zhou; Xiaolu Wang

Publisher: John Wiley and Sons
Year: 2008
Tongue: English
Weight: 194 KB
Volume: 24
Category: Article
ISSN: 1524-1904
DOI: 10.1002/asmb.714

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✦ Synopsis

Abstract

By approximating the distribution of the sum of correlated lognormals with some log‐extended‐skew‐normal distribution, we present closed‐form approximation formulae for pricing both Asian and basket options. Numerical comparison shows that our formulae provide both computational simplicity and accuracy. Copyright © 2008 John Wiley & Sons, Ltd.

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## Abstract In this article we first identify a missing term in the Bouaziz, Briys, and Crouhy (1994) pricing formula for forward‐starting Asian options and derive the correct one. First, illustrate in certain cases that the missing term in their pricing formula could induce large pricing errors or