We are grateful to the anonymous referee, Kyu-Hyun Son, and the editor, Robert Webb, for valuable and detailed comments on this study. All errors are our responsibility.
Pricing basket and Asian options under the jump-diffusion process†
Article first published online: 25 JAN 2011
© 2011 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 31, Issue 9, pages 830–854, September 2011
How to Cite
Bae, K., Kang, J. and Kim, H.-S. (2011), Pricing basket and Asian options under the jump-diffusion process. J. Fut. Mark., 31: 830–854. doi: 10.1002/fut.20508
- Issue published online: 1 JUL 2011
- Article first published online: 25 JAN 2011
- Manuscript Accepted: NOV 2010
- Manuscript Received: APR 2010
This study derives approximate valuation formulas for basket options and Asian options under the jump-diffusion process. To obtain an approximation for options prices under the jump-diffusion process, we extend the Taylor expansion method developed by Ju N. (2002) under the diffusion process. We show that the Taylor expansion method, suggested in this study, provides better pricing performance as compared to log-normal or four-moment methods. The performance improvement using the Taylor expansion method increases as the time to maturity increases. In addition, our numerical analysis shows that jump effects become significant when the expected jump sizes take large negative values. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 31:830–854, 2011