Pricing Dual Spread Options by the Lie-Trotter Operator Splitting Method

IAENG International Journal of Applied Mathematics, Forthcoming

5 Pages Posted: 8 May 2013 Last revised: 29 Nov 2014

See all articles by Chi-Fai Lo

Chi-Fai Lo

The Chinese University of Hong Kong

Date Written: November 28, 2014

Abstract

In this paper, based upon the Lie-Trotter operator splitting method proposed by Lo (2014), we present a simple closed-form approximation for pricing the (three-asset) dual spread options. Illustrative numerical examples show that the proposed approximation is not only extremely fast and robust, but also it is very accurate for typical volatilities and maturities of up to two years. Moreover, for the case of a vanishing strike the proposed approximation becomes exact.

Keywords: Spread options, Kirk's approximation, Lie-Trotter opertor splitting method

Suggested Citation

Lo, Chi-Fai, Pricing Dual Spread Options by the Lie-Trotter Operator Splitting Method (November 28, 2014). IAENG International Journal of Applied Mathematics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2261620 or http://dx.doi.org/10.2139/ssrn.2261620

Chi-Fai Lo (Contact Author)

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

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