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

Author

Listed:
  • Nuerxiati Abudurexiti
  • Kai He
  • Dongdong Hu
  • Hasanjan Sayit

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].

Suggested Citation

  • Nuerxiati Abudurexiti & Kai He & Dongdong Hu & Hasanjan Sayit, 2025. "A note on closed-form spread option valuation under log-normal models," Quantitative Finance, Taylor & Francis Journals, vol. 25(1), pages 143-160, January.
    • Handle: RePEc:taf:quantf:v:25:y:2025:i:1:p:143-160
    DOI: 10.1080/14697688.2024.2414761
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