Lower bound approximation of nonlinear basket option with jump-diffusion

Document Type : Research Paper

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