A simple closed-form approximation for constant elasticity of variance spread options

C. F. Lo and X. F. Zheng
Additional contact information
C. F. Lo: Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong
X. F. Zheng: Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong

International Journal of Financial Engineering (IJFE), 2020, vol. 07, issue 04, 1-13

Abstract: By applying the Lie–Trotter operator splitting method and the idea of the WKB method, we have developed a simple, accurate and efficient analytical approximation for pricing the constant elasticity of variance (CEV) spread options. The derived option price formula bears a striking resemblance to Kirk’s formula of the Black–Scholes spread options. Illustrative numerical examples show that the proposed approximation is not only extremely fast and robust, but it is also remarkably accurate for typical volatilities and maturities of up to two years.

Keywords: Constant elasticity of variance model; Black–Scholes equation; spread options; Kirk’s approximation; Lie–Trotter operator splitting method; WKB method (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786320500474
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:07:y:2020:i:04:n:s2424786320500474

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786320500474

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().