A Fourier transform method for spread option pricing
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Publication:3563689
DOI10.1137/090750421zbMATH Open1188.91218arXiv0902.3643OpenAlexW2015433547MaRDI QIDQ3563689FDOQ3563689
Authors: T. R. Hurd, Zhuowei Zhou 
Publication date: 1 June 2010
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: 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.
Full work available at URL: https://arxiv.org/abs/0902.3643
Recommendations
Derivative securities (option pricing, hedging, etc.) (91G20) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Gamma, beta and polygamma functions (33B15) Numerical methods for discrete and fast Fourier transforms (65T50)
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