Not Available for Download

Closed-Form Approximations for Spread Option Prices and Greeks

Posted: 12 Feb 2008 Last revised: 12 Oct 2009

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

Multiple version iconThere are 2 versions of this paper

Date Written: 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

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: https://ssrn.com/abstract=1091166

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

Paper statistics

Abstract Views
982