Journal of Mathematical Sciences: Advances and ApplicationsAuthor's: Werner Hürlimann
Pages: [13] - [41]
Received Date: December 3, 2013
Submitted by:
An alternative to the Black-Scholes-Vasicek deflator is proposed. It is based on a simple multivariate exponential normal variance-mean mixture Lévy process. Closed-form analytical integral formulas for pricing the European geometric basket option with a deflated normal variance-mean price process are obtained. Applications to the variance-gamma, the normal inverse Gaussian and the normal tempered stable processes are included. An extended Black-Scholes formula that takes into account the correlation structure of the market is also derived.
normal variance-mean mixture, Lévy process, variance-gamma, normal inverse Gaussian, normal tempered stable, state-price deflator, market price of risk, geometric basket option, extended Black-Scholes formula.
