Abstract

http://ssrn.com/abstract=1091166
 
 

Citations



 


 



Closed-Form Approximations for Spread Option Prices and Greeks


Minqiang Li


Bloomberg LP

Shijie Deng


Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Jieyun Zhou


Georgia 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 Series


Not Available For Download

Date posted: February 12, 2008 ; Last revised: October 12, 2009

Suggested Citation

Li, Minqiang and Deng, Shijie and Zhou, Jieyun, Closed-Form Approximations for Spread Option Prices and Greeks (2008). Journal of Derivatives, Vol. 15, No. 3, pp. 58-80, 2008. Available at SSRN: http://ssrn.com/abstract=1091166

Contact Information

Minqiang Li (Contact Author)
Bloomberg LP ( email )
731 Lexington Avenue
New York, NY 10022
United States
Shijie Deng
Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )
765 Ferst Drive
Atlanta, GA 30332-0205
United States
Jieyun Zhou
Georgia Institute of Technology ( email )
Atlanta, GA 30332
United States
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