RT Journal Article SR Electronic T1 A Note to Enhance the BPW Model for the Pricing of Basket and Spread Options JF The Journal of Derivatives FD Institutional Investor Journals SP 77 OP 82 DO 10.3905/jod.2012.19.3.077 VO 19 IS 3 A1 Jui-Jane Chang A1 Son-Nan Chen A1 Ting-Pin Wu YR 2012 UL https://pm-research.com/content/19/3/77.abstract 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