Asian Basket Spread Options: A New Approximation Based on Stochastic Taylor Expansions

Abstract

We present closed analytical approximations for the pricing of Asian basket spread options under the Black-Scholes model. The formulae are obtained by using a stochastic Taylor expansion around a log-normal proxy model and are found to be highly accurate for Asian and spread options in practice. Unlike other approaches, they do not require any numerical integration or root solving.

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