A note on closed-form spread option valuation under log-normal models

Nuerxiati Abudurexiti, Kai He, Dongdong Hu, Hasanjan Sayit*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

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].

Original languageEnglish
Pages (from-to)143-160
Number of pages18
JournalQuantitative Finance
Volume25
Issue number1
DOIs
Publication statusPublished - 2025

Keywords

  • Log-normal models
  • Risk-neutral pricing
  • Spread options

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