Abstract
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. <b>TOPICS:</b>Options, statistical methods
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