Department of Economics and Business - Universitat Pompeu Fabra

Title:: On the closed-form approximation of short-time random strike options
Authors:: Elisa AlÃ²s and Jorge A. LeÃ³n
Date:: May 2013
Abstract:: In this paper we propose a general technique to develop first and second order closed-form approximation formulas for short-time options with random strikes. Our method is based on Malliavin calculus techniques and allows us to obtain simple closed-form approximation formulas depending on the derivative operator. The numerical analysis shows that these formulas are extremely accurate and improve some previous approaches on two-assets and three-assets spread options as Kirk's formula or the decomposition mehod presented in Alòs, Eydeland and Laurence (2011).
Keywords:: Spread options, Kirk's formula, Malliavin calculus, derivative operator in the Malliavin calculus sense, Skorohod integral.
JEL codes:: G12, G13
Area of Research:: Statistics, Econometrics and Quantitative Methods

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