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Closed-Form Approximations for Spread Option Prices and GreeksMinqiang LiBloomberg LP Shijie DengGeorgia Institute of Technology - School of Industrial and Systems Engineering Jieyun ZhouGeorgia Institute of Technology 2008 Journal of Derivatives, Vol. 15, No. 3, pp. 58-80, 2008 Abstract: We develop a new closed-form approximation method for pricing spread options. Numerical analysis shows that our method is more accurate than existing analytical approximations. Our method is also extremely fast, with computing time more than two orders of magnitude shorter than one-dimensional numerical integration. We also develop closed-form approximations for the greeks of spread options. In addition, we analyze the price sensitivities of spread options and provide lower and upper bounds for digital spread options. Our method enables the accurate pricing of a bulk volume of spread options with different specifications in real time, which offers traders a potential edge in financial markets. The closed-form approximations of greeks serve as valuable tools in financial applications such as dynamic hedging and Value-at-Risk calculations.
Keywords: Spread options, exercise boundary, closed-form approximation JEL Classification: C14, G12, G13 Accepted Paper SeriesDate posted: February 12, 2008 ; Last revised: October 12, 2009Suggested CitationContact Information
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