Pricing Basket Spread Option Under the Correlated Skew Brownian Motions
ABSTRACT In this article, we propose synthetic analytical approximate pricing formulas for basket and basket spread options within a multidimensional correlated skew Brownian motion framework. For basket options, we derive two analytical approximate pricing formulas by utilizing the partial exact approximation, the moment matching method and convex bounds approximation together and achieve accurate and analytical approximations. For basket spread options, we derive a lower bound approximation using the Bjerksund–Stensland‐type approach. Numerical examples demonstrate superior performance with consistent robustness and high precision of our formulas, remarkably maintaining excellent performance for high‐dimensional options. We also note that these approximate pricing formulas can serve as powerful control variates for the variance reduction of Monte Carlo simulations.
Authors
- Xingye Yue
- Jing Yao (ORCID: https://orcid.org/0000-0002-8936-2600)
- Qifeng Zhong
Institutions
- Soochow University (CN)
Publication Details
- Journal
- Applied Stochastic Models in Business and Industry
- Published
- 2025-08-31
- DOI
- https://doi.org/10.1002/asmb.70040
- Primary Topic
- Stochastic processes and financial applications
- Type
- article
- Field-Weighted Citation Impact
- 0.00
Funders
- National Natural Science Foundation of China