TY - JOUR
T1 - A note on closed-form spread option valuation under log-normal models
AU - Abudurexiti, Nuerxiati
AU - He, Kai
AU - Hu, Dongdong
AU - Sayit, Hasanjan
N1 - Publisher Copyright:
© 2025 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2025
Y1 - 2025
N2 - In the papers Carmona and Durrleman [Pricing and hedging spread options in a log-normal model. Technical report: Department of Operations Research and Financial Engineering, Princeton, NJ, Princeton University, 2003] and Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794], closed-form approximations for spread call option prices were studied under the log-normal models. In this paper, we give an alternative closed-form formula for the price of spread call options under the log-normal models also. Our formula can be seen as a generalization of the closed-form formula presented in Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794] as their formula can be obtained by selecting special parameter values for our formula. Numerical tests show that our formula performs better for a certain range of model parameters than the closed-form formula presented in Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794].
AB - In the papers Carmona and Durrleman [Pricing and hedging spread options in a log-normal model. Technical report: Department of Operations Research and Financial Engineering, Princeton, NJ, Princeton University, 2003] and Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794], closed-form approximations for spread call option prices were studied under the log-normal models. In this paper, we give an alternative closed-form formula for the price of spread call options under the log-normal models also. Our formula can be seen as a generalization of the closed-form formula presented in Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794] as their formula can be obtained by selecting special parameter values for our formula. Numerical tests show that our formula performs better for a certain range of model parameters than the closed-form formula presented in Bjerksund and Stensland [Closed form spread option valuation. Quant. Finance, 2014, 14(10), 1785–1794].
KW - Log-normal models
KW - Risk-neutral pricing
KW - Spread options
UR - http://www.scopus.com/inward/record.url?scp=86000426738&partnerID=8YFLogxK
U2 - 10.1080/14697688.2024.2414761
DO - 10.1080/14697688.2024.2414761
M3 - Article
AN - SCOPUS:86000426738
SN - 1469-7688
VL - 25
SP - 143
EP - 160
JO - Quantitative Finance
JF - Quantitative Finance
IS - 1
ER -