PT  - JOURNAL ARTICLE
AU  - Jui-Jane Chang
AU  - Son-Nan Chen
AU  - Ting-Pin Wu
TI  - A Note to Enhance the BPW Model for the Pricing of Basket and Spread Options
AID  - 10.3905/jod.2012.19.3.077
DP  - 2012 Feb 29
TA  - The Journal of Derivatives
PG  - 77--82
VI  - 19
IP  - 3
4099  - https://pm-research.com/content/19/3/77.short
4100  - https://pm-research.com/content/19/3/77.full
AB  - The standard assumption for an underlying asset’s returns process is the lognormal diffusion. This works quite well for individual assets. Portfolios and indexes present a problem, however, because a weighted sum of lognormally distributed stock prices is not lognormal. But a lognormal approximation can typically still be used as long as all of the weights are positive. That condition fails for options on a spread, which generally involves approximately equally sized long and short positions. In the Summer 2007 issue of this journal, Borovkova, Permana, and Weide (BPW) presented a solution based on matching the moments of the returns distribution to a generalized lognormal. Here, Wu, Chang and Chen show how to speed up the BPW procedure considerably by using closed-form expressions for the relevant moments.TOPICS: Options, statistical methods