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Sum of All Black-Scholes-Merton Models: An Efficient Pricing Method for Spread, Basket, and Asian Options

by Choi, Jaehyuk

ARTICLE | Journal of Futures Markets | Vol.38, 2018


Contrary to the common view that exact pricing is prohibitive owing to the curse of dimensionality, this study proposes an efficient and unified method for pricing options under multivariate Black–Scholes–Merton (BSM) models, such as the basket, spread, and Asian options. The option price is expressed as a quadrature integration o fanalytic multi-asset BSM prices under a single Brownian motion.Then the state space is rotated in such a way that the quadrature requires much coarse rnodes than it would otherwise or low varying dimensions are reduced. The accuracy and efficiency of the method is illustrated through various numerical experiments.

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