Closed-Form Approximations for Spread Options in Lévy Markets

Forthcoming in Applied Stochastic Models in Business and Industry

20 Pages Posted: 23 Jan 2018 Last revised: 2 Aug 2018

Jente van Belle

Vrije Universiteit Brussel (VUB)

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Jing Yao

Vrije Universiteit Brussel (VUB)

Date Written: July 23, 2018

Abstract

We provide new closed-form approximations for the pricing of spread options in three specific instances of exponential Lévy markets, i.e., 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.

Keywords: Stochastic Clock, Lévy Markets, Conditional Expectation, Gaussian Quadrature, Margrabe’s Formula

Suggested Citation

Belle, Jente van and Vanduffel, Steven and Yao, Jing, Closed-Form Approximations for Spread Options in Lévy Markets (July 23, 2018). Forthcoming in Applied Stochastic Models in Business and Industry. Available at SSRN: https://ssrn.com/abstract=3102177 or http://dx.doi.org/10.2139/ssrn.3102177

Jente van Belle

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

Jing Yao (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, B-1050
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
32
Abstract Views
114
PlumX