Closed‐form approximations for spread options in Lévy markets

Jente Van Belle, Steven Vanduffel () and Jing Yao

Applied Stochastic Models in Business and Industry, 2019, vol. 35, issue 3, 732-746

Abstract: We provide new closed‐form approximations for the pricing of spread options in three specific instances of exponential Lévy markets, ie, when log‐returns are modeled as Brownian motions (Black‐Scholes model), variance gamma processes (VG model), or normal inverse Gaussian processes (NIG model). For the specific case of exchange options (spread options with zero strike), we generalize the well‐known Margrabe formula (1978) that is valid in a Black‐Scholes model to the VG model under a homogeneity assumption.

Date: 2019
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https://doi.org/10.1002/asmb.2391

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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:35:y:2019:i:3:p:732-746

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