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NTU Management Review Vol. 34 No. 1 Apr. 2024

5. Conclusion

This study adopts the unbounded-system distribution of the Johnson (1949)
distribution family to approximate the basket/spread distribution, and derive a united

pricing model for both basket and spread options. Our proposed pricing model can
accurately and instantly price both basket and spread options even in difficult situations,
where option maturity is longer and underlying assets exhibit high volatilities and low
correlation. Besides the pricing advantage, the Greeks derived from our pricing formulas

help financial institutions efficiently integrate and manage the risks of issuing both basket
and spread options. Therefore, our pricing model can reduce pricing errors, enhance
hedging efficiency; thus lower the hedging cost of both basket and spread options. Based
on the aforementioned merits, the resulting pricing formulas provide market practitioners

with an accurate, efficient and time-saving approach for offering almost instantly-
quoted prices to clients and the daily marking-to-market trading books, and facilitating
efficient risk management of trading positions. Thus, the presented formulas are worth
recommending to market practitioners. 11

11 This study adopts a geometric Brownian motion to specify the dynamics of the prices of the
underlying assets. Future research can employ the stochastic volatility model or a jump diffusion
process to specify these dynamics.

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