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On the closed-form approximation of short-time random strike options
Alòs, Elisa; León, Jorge A.
Universitat Pompeu Fabra. Departament d'Economia i Empresa
In this paper we propose a general technique to develop first and second order closed-form approximation formulas for short-time options withrandom strikes. Our method is based on Malliavin calculus techniques andallows us to obtain simple closed-form approximation formulas dependingon the derivative operator. The numerical analysis shows that these formulas are extremely accurate and improve some previous approaches ontwo-assets and three-assets spread options as Kirk's formula or the decomposition mehod presented in Alòs, Eydeland and Laurence (2011).
Statistics, Econometrics and Quantitative Methods
spread options
kirk's formula
malliavin calculus
derivative operator in the malliavin calculus sense
skorohod integral.
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