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
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
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