Option is one of derivative instruments that can help investors improve their expected return and minimize the risks. However, the Black-Scholes formula is generally used in determining the price of the option does not involve skewness factor and it is difficult to apply in computing process because it produces oscillation for the skewness values close to zero. In this paper, we construct option pricing formula that involve skewness by modified Black-Scholes formula using Shifted Poisson model and transformed it into the form of a Linear Approximation in the complete market to reduce the oscillation. The results are Linear Approximation formula can predict the price of an option with very accurate and successfully reduce the oscillations in the calculation processes.
Rachmawati R. N, Irene and Budiharto D. W. (2013). Oscillatory Reduction in Option Pricing Formula Using Shifted Poisson and Linear Approximation. EPJ Web of Conferences, 68 (6), 1-6.