Closed-form approximations for spread options in Lévy markets

Jente Van Belle, Steven Vanduffel, Jing Yao

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Abstract

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

Original languageEnglish
JournalApplied Stochastic Models in Business and Industry
Early online date29 Aug 2018
DOIs
Publication statusE-pub ahead of print - 29 Aug 2018

Keywords

  • conditional expectation
  • Gaussian quadrature
  • Lévy markets
  • Margrabe's formula
  • stochastic clock

ASJC Scopus subject areas

  • Modelling and Simulation
  • Business, Management and Accounting(all)
  • Management Science and Operations Research

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