EconPapers    
Economics at your fingertips  
 

A general closed-form spread option pricing formula

Ruggero Caldana and Gianluca Fusai

Journal of Banking & Finance, 2013, vol. 37, issue 12, 4893-4906

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 algorithms performing numerical experiments on different stochastic dynamic models.

Keywords: Spread option; Exchange option; Stochastic process; Characteristic function; Fourier inversion; Control variate (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426613003476
Full text for ScienceDirect subscribers only

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:eee:jbfina:v:37:y:2013:i:12:p:4893-4906

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().

 
Page updated 2017-09-29
Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:4893-4906