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Closed‐form approximations for spread options in Lévy markets

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  • Jente Van Belle
  • Steven Vanduffel
  • Jing Yao

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.

Suggested Citation

  • Jente Van Belle & Steven Vanduffel & Jing Yao, 2019. "Closed‐form approximations for spread options in Lévy markets," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 35(3), pages 732-746, May.
    • Handle: RePEc:wly:apsmbi:v:35:y:2019:i:3:p:732-746
    DOI: 10.1002/asmb.2391
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    Cited by:

    1. Edoardo Berton & Lorenzo Mercuri, 2021. "An Efficient Unified Approach for Spread Option Pricing in a Copula Market Model," Papers 2112.11968, arXiv.org, revised Feb 2023.

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