publication . Article . 2013

A General Closed-Form Spread Option Pricing Formula

Caldana, R.; Fusai, G.;
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  • Published: 01 Dec 2013 Journal: SSRN Electronic Journal (eissn: 1556-5068, Copyright policy)
  • Publisher: Elsevier BV
  • Country: United Kingdom
Abstract
We propose a new accurate method for pricing European spread options by extending the lower bound approximation of Bjerksund and Stensland (2011) beyond the classical Black–Scholes framework. This is possible via a procedure requiring a univariate Fourier inversion. In addition, we are also able to obtain a new tight upper bound. Our method provides also an exact closed form solution via Fourier inversion of the exchange option price, generalizing the Margrabe (1978) formula. The method is applicable to models in which the joint characteristic function of the underlying assets forming the spread is known analytically. We test the performance of these new pricing...
Subjects
free text keywords: Economics and Econometrics, Finance, Financial economics, Stochastic process, Fourier transform, symbols.namesake, symbols, Characteristic function (probability theory), Control variates, Economics, Closed-form expression, Spread option, Upper and lower bounds, Finite difference methods for option pricing, HG
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