Pricing Basket Options under the process with jumps

Abstract

This paper derives an approximate pricing formula for basket option when the dynamics of each asset price included in the basket follow the jump-diffusion process. To obtain an approximation for a basket option price, we adopt the Taylor expansion method by Ju (2002). We show that the Taylor expansion method suggested in this paper provides the best pricing performance among the log-normal, the four moments and the Taylor expansion approximations. Performance improvement using the Taylor expansion method becomes bigger, as the time to maturity becomes longer or when jumps are asymmetric.