A Fourier transform method for spread option pricing

Details A Fourier transform method for spread option pricing A Fourier transform method for spread option pricing

2009-02-20

arxiv.org/abs/0902.3643v1

Economy

Quantitative Finance

Computational Finance

16 pages, 3 figures

Scientific paper

Spread options are a fundamental class of derivative contract written on multiple assets, and are widely used 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 models. The present paper introduces a new formula for general spread option pricing based on Fourier analysis of the spread option payoff function. Our detailed investigation proves the effectiveness of a fast Fourier transform implementation of this formula for the computation of 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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