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Closed Form Spread Option Valuation

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type , Research , Preprint 01 Jan 2006 Norway Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

Authors: Bjerksund, Petter; Stensland, Gunnar;

doi: 10.2139/ssrn.1145206 , 10.1080/14697688.2011.617775

handle: 11250/164107

Closed Form Spread Option Valuation

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Abstract

This paper considers the valuation of a spread call when asset prices are log-normal. The implicit strategy of the Kirk formula is to exercise if the price of the long asset exceeds a given power function of the price of the short asset. We derive a formula for the spread call value, conditional on following this feasible, but non-optimal, exercise strategy. Numerical investigations indicate that the lower bound produced by our formula is extremely accurate. The precision is much greater than the Kirk formula. Moreover, optimizing with respect to the strategy parameters (which corresponds to the Carmona–Durrleman procedure) yields only a marginal improvement of accuracy (if any).

Country

Norway

Related Organizations

Norwegian School of Economics
Norway

Keywords

spread option, closed form, VDP::Samfunnsvitenskap: 200::Økonomi: 210, lognormal asset prices, valuation formula, Spread option; closed form; valuation formula; lognormal asset prices, jel: jel:D81, jel: jel:C63, jel: jel:G12, jel: jel:G13

Impact byBIP!

	citations This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).	63
	popularity This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.	Top 10%
	influence This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).	Top 10%
	impulse This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.	Average