A Fourier transform method for spread option pricing

TL;DR

This paper introduces a Fourier transform-based formula for spread option pricing, demonstrating its accuracy, efficiency, and broad applicability across various financial models using FFT implementation.

Contribution

A novel Fourier analysis approach for spread option pricing that is easy to implement, stable, and versatile across different asset models.

Findings

FFT implementation is fast and accurate for spread option prices.

The method is stable and applicable to various asset models.

It outperforms traditional approximation methods in flexibility and efficiency.

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.