Closed-form approximations for spread options in Lévy markets

Jente Van Belle; Steven Vanduffel; Jing Yao

doi:10.1002/asmb.2391

Closed-form approximations for spread options in Lévy markets

Jente Van Belle, Steven Vanduffel, Jing Yao^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

5 Citations (Scopus)

79 Downloads (Pure)

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 language	English
Journal	Applied Stochastic Models in Business and Industry
Early online date	29 Aug 2018
DOIs	https://doi.org/10.1002/asmb.2391
Publication status	E-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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10.1002/asmb.2391

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This is the peer reviewed version of the following article: Van Belle J, Vanduffel S, Yao J. Closed‐form approximations for spread options in Lévy markets. Appl Stochastic Models Bus Ind. 2018;1–15, which has been published in final form at https://doi.org/10.1002/asmb.2391. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
Accepted author manuscript, 402 KBLicence: Copyright Publisher

Cite this

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KW - conditional expectation

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KW - Margrabe's formula

KW - stochastic clock

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ER -

Closed-form approximations for spread options in Lévy markets

Abstract

Keywords

ASJC Scopus subject areas

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