Closed form spread option valuation
AbstractThis paper considers the valuation of a spread call when asset prices are lognormal. 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 higher 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).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/20.
Length: 18 pages
Date of creation: 01 Dec 2006
Date of revision:
Contact details of provider:
Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
More information through EDIRC
Spread option; closed form; valuation formula; lognormal asset prices;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-09 (All new papers)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Lorenz Schneider, 2014. "A Stochastic Volatility Model for Crude Oil Futures Curves and the Pricing of Calendar Spread Options," Papers 1401.7913, arXiv.org.
- Elisa AlÃ²s & Jorge A. LeÃ³n, 2013. "On the closed-form approximation of short-time random strike options," Economics Working Papers 1347, Department of Economics and Business, Universitat Pompeu Fabra.
- Griselda Deelstra & Alexandre Petkovic & MichÃ¨le Vanmaele, 2008. "Pricing and Hedging Asian Basket Spread Options," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2008_004, ULB -- Universite Libre de Bruxelles.
- Tommaso Paletta & Arturo Leccadito & Radu Tunaru, 2013. "Pricing and Hedging Basket Options with Exact Moment Matching," Papers 1312.4443, arXiv.org.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stein Fossen).
If references are entirely missing, you can add them using this form.