Lower bound approximation of nonlinear basket option with jump-diffusion

Document Type : Research Article

Authors

1 Department of Applied Mathematics, Ferdowsi University of Mashhad, Mashhad, Iran

2 Department of applied mathematics Ferdowsi university of Mashhad Mashhad and The Center of Excellence on Modeling and Control Systems, Ferdowsi University of Mashhad, Iran

3 Department of Statistics, Ferdowsi University of Mashhad, Mashhad, Iran

Abstract

We extend the method presented by  Xu and Zheng (Int. J. Theor. Appl. Finance 17 (2014) 21--36) for the general case. We develop a numerical-analytic formula for pricing nonlinear basket options with jump-diffusion model. We derive an easily computed method by using the asymptotic expansion to find the approximate value of the lower bound of nonlinear European basket call prices since a nonlinear basket option is generally not closed-form. We use  Split Step Backward Euler and Compensated Split Step Backward Euler methods with Monte Carlo simulation to check the validity of the presented method.

Keywords

Journal of Mathematical Modeling
Volume 9, Issue 1
January 2021
Pages 31-44

Files

Share

How to cite

Statistics