A Fourier Transform Method for Spread Option Pricing
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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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