Article2010

A Fourier Transform Method for Spread Option Pricing

182 citations0/0 files storedSIAM Journal on Financial Mathematics

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Stochastic processes and financial applications Financial Markets and Investment Strategies Mathematical functions and polynomials

Abstract

Spread options are a fundamental class of derivative contracts written on multiple assets and are widely traded in a range of financial markets. There is a long history of approximation methods for computing such products, but as yet there is no preferred approach that is accurate, efficient, and flexible enough to apply in general asset models. The present paper introduces a new formula for general spread option pricing based on Fourier analysis of the payoff function. Our detailed investigation, including a flexible and general error analysis, proves the effectiveness of a fast Fourier transform implementation of this formula for the computation of spread option prices. It is found to be easy to implement, stable, efficient, and applicable in a wide variety of asset pricing models.

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References

1999Option valuation using the fast Fourier transform 1998The Variance Gamma Process and Option Pricing 1978THE VALUE OF AN OPTION TO EXCHANGE ONE ASSET FOR ANOTHER 1990The Variance Gamma (V.G.) Model for Share Market Returns 2003Pricing and Hedging Spread Options 2004Option pricing by transform methods: extensions, unification and error control 2008A Fast and Accurate FFT-Based Method for Pricing Early-Exercise Options under Lévy Processes

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2010Analysis of Fourier Transform Valuation Formulas and Applications 2014Multivariate asset models using Lévy processes and applications 2013A General Closed-Form Spread Option Pricing Formula 2012Option Pricing in Multivariate Stochastic Volatility Models of OU Type 2015General closed-form basket option pricing bounds 2015Affine LIBOR Models with Multiple Curves: Theory, Examples and Calibration 2011Efficient Options Pricing Using the Fast Fourier Transform

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